If you woke up this morning and only looked at the AI sector, you’d probably think we were in the middle of a vicious bear market.
The latest sell catalyst?
A new Chinese artificial intelligence model called Kimi K3 from Moonshot AI. Early reports suggest it delivers performance comparable to leading models from OpenAI and Anthropic while using significantly fewer computing resources. Whether those claims ultimately prove true or not, the market wasted no time reacting.
Semiconductor stocks were hit especially hard, with the Philadelphia Semiconductor Index (SOX) tumbling into bear-market territory from its June highs. Many of the AI leaders that investors couldn’t buy fast enough just weeks ago suddenly became the stocks everyone wanted to sell.
Yet here’s the interesting part.
The S&P 500 remains within roughly 2.5% of its all-time closing high. Even more impressive, the Invesco S&P 500 Equal Weight ETF (RSP) is on pace to finish the week at its highest closing price ever - a sign that this bull market has broadened well beyond the Magnificent Seven.
That’s a remarkable disconnect.
The headlines tell you stocks are expensive.
Reality tells you many of the companies driving the next technological revolution have already experienced corrections of 50% or more.
You don’t have to look very hard to find them.
Many of these are stocks we’ve discussed over the past year. Some are down 40%. Others 50%. A few even more. Yet if you asked me whether artificial intelligence will be bigger three years from now than it is today, my answer is an emphatic yes.
Here are a few examples…
Credo Technology Group (CRDO) down 40%, but still up 100% over the last 12 months.
Micron (MU) down 35%, but still up 670% in the last year.
And one of my long-term favorites and a big winner for our subscribers – Teradyne (TER) is nearly 40% off the late June high. But, remains up 240% since last July.
Again, the equal weight S&P 500 index is set to close at a historic high, yet many of the most important stocks in the future of innovation are in a bear market.
That’s the disconnect I’m trying to capitalize on.
To me, those are two completely different markets.
This is why I constantly remind readers not to confuse the index with the opportunity.
When people say, “The market is too expensive,” they’re usually referring to an average.
But averages don’t tell you where the bargains are hiding.
Some of today’s most promising AI infrastructure, semiconductor, robotics, quantum computing, and digital infrastructure companies have already endured corrections that feel like full-fledged bear markets - even while the major indexes sit near record highs.
And here’s something else that’s easy to forget.
The market isn’t selling these companies because artificial intelligence is over.
It’s selling them because investors are trying to determine who wins the next phase of AI.
If AI models can become dramatically more efficient, the winners inside the ecosystem may shift. Some chip companies could see less demand than expected, while software companies, enterprise AI providers, edge computing firms, and businesses that benefit from cheaper AI could become even bigger winners.
That’s exactly how technological revolutions unfold.
The internet created enormous wealth, but it also produced thousands of violent corrections and plenty of changing leaders along the way.
Artificial intelligence won’t be any different.
In fact, the recent volatility has been extraordinary. Over the past several months, the Nasdaq has been anything but quiet. Daily swings of 1% or more have become far more common than normal, even though the index itself has traded within a surprisingly tight range of only a few percentage points.
Investors have been aggressively rotating beneath the surface, trying to decide which companies will dominate the next chapter of the AI revolution.
I don’t see that as a warning sign.
I see it as price discovery.
History tells us the biggest fortunes aren’t made by buying after uncertainty disappears.
They’re made by buying outstanding businesses while Wall Street argues over the short-term narrative.
Every major technological revolution has had moments when investors questioned whether the opportunity had already peaked.
The automobile.
The personal computer.
The internet.
The smartphone.
Every one of them experienced violent corrections that convinced investors the story was over.
It wasn’t.
I believe AI will follow the same path.
The technology isn’t slowing down.
Capital spending isn’t slowing down.
Enterprise adoption isn’t slowing down.
If anything, innovation is accelerating.
The stocks, however, don’t move in straight lines.
That’s why I’m spending far more time looking at the AI names that are already down 50% than I am worrying about whether the S&P 500 is sitting near another all-time high.
Because history suggests that’s exactly where tomorrow’s biggest winners are often found.
Here’s to the future,
Matt McCall
Editor, Market Insights
