I'm Cutting Back on AI Exposure as Palantir Turn Signals Slowdown
The characteristics of price action are changing, requiring new tactics and strategies.
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The market is struggling on Tuesday morning, with nearly 70% of stocks suffering losses and the Magnificent Seven (MAGS) group dropping 1.4%.
The primary catalyst for the selling pressure is Palantir's (PLTR) 7% drop following a very strong earnings report. It beat on revenue and EPS, had good guidance and even target price increases, but the primary justification for the weakness is valuation.
The entire AI sector is dealing with growing concerns about valuation. There is a group of bears loudly proclaiming that the hyperscalers will never recover their giant investments, and even if they do, it is already largely priced into their stock price. Bullish investors believe that AI is still in its early stages, and we haven’t even begun to fully appreciate the profound economic impact it will have.
I don’t know who is right or wrong, but the likelihood is high that there will be a period of debate, which will lead to consolidation and slow down the AI leaders. That doesn’t mean a significant market top will form, but there will be some transitional and rotational action as it progresses.
At this point, the primary issues are how deep of a pullback might occur and whether there will be rotational action or very broad selling pressure. It is tough for buyers to be aggressive in new areas when the old leaders are deteriorating, but there should be some signs of support that provide evidence of interest.
My game plan is to cut back some of the AI and technology names. I’ve sold off all Magnificent Seven exposure except for a little Nvidia (NVDA) , but I still have some data center exposure and a few small AI-related plays like SoundHound AI (SOUN) .
I’m focusing much more on valuations and earnings and am looking at buying pullbacks rather than chasing momentum.
I’m keeping careful track of stocks that just reported good earnings but have been unable to generate sustained upside. There should be some good buys in these names as they pull back in weak market conditions.
We do have positive seasonality ahead of us, which I think will deliver some shorter-term rallies, but I do not expect a strong uptrend for the indices at this point. It will be much more important to focus on stock picking rather than index timing.
It is very tough right now, but this is the sort of ugly action that always leads to some good opportunities. We just need to make sure we get the timing right.
At the time of publication, DePorre was long NVDA and SOUN.
