Is Curtain Falling on Market's AI 'Wizards'?

Last week’s trading action reminded me of the ending to the Wizard of Oz, when the all-powerful wizard gets outed as just a regular guy behind a curtain, manipulating things to appear more powerful than he actually was. The wizard in this analogy being the vendor financing circle that has become central to the AI narrative. This has powered the majority of the gains in the market over the past three years.

More dents seem to be developing around this story and growing doubts on this front triggered a 3% decline in the tech-heavy Nasdaq last week. It was the worst weekly performance for the index since early April, when "reciprocal tariffs" were announced.

Investors are finally asking some questions on the massive AI spending that is powering both equities and the economy. Super Micro Computer, Inc.  (SMCI) , which is benefiting greatly from the huge demand for new data centers, was the worst performing stock in the S&P 500 last week. It lost a quarter of its value in five trading sessions. Palantir Technologies Inc. (PLTR)  dropped some 13% last week, despite beating expectations with its third-quarter numbers and boosting guidance. Michael Burry, made famous in the movie the "Big Short," has roughly 80% of his fund now against the stocks of Palantir and Nvidia Corporation (NVDA) . Palantir’s CEO ripped short selling last as “market manipulation.”  Never a good look.

The CEO of OpenAI, Sam Altman, also got visibly peeved when asked how a company that should have around $14 billion in revenues this year can have some $1.4 trillion in future obligations for computing power. OpenAI’s CFO had to walk back comments that seem to allude to having a federal government backstop. At the same time, OpenAI is pushing the government to expand a tax credit related to the CHIPS Act to be used to cover data center infrastructure parts and to also accelerate related regulatory processes.

I will be watching closely to see if last week’s trading action was just a temporary spasm or the beginning of the AI bubble finally deflating. That latter would have hugely negative ramifications for both the markets and the economy as it is hard to find many positives right now for either outside this huge surge in tech spending.

The federal government is increasingly dysfunctional. Fortunately, the longest government shutdown in U.S. history looks like it could come to a close this week. Of course, the deal that makes that happen was offered in basically in the same form a month ago. Like the previous government shutdown, the pols only got serious in getting to a resolution when it started to affect national air travel. At the local level, the three largest cities in the country are now headed by self-avowed socialists.

Consumer sentiment continues to plumb the depths as the jobs markets are clearly faltering. The government shutdown prevented the October Bureau of Labor Statistics jobs report from posting on Friday. But a survey of economists projected that if this report would have come out, it would have showed 60,000 jobs were lost last month. Meanwhile, both the residential and commercial real estate markets continue to deteriorate and face another difficult year ahead.

So, was last week’s trading action just a "hiccup" or a sign of hard times on the horizon for investors? My gut tells me there will be enough window dressing and other tailwinds to keep the AI narrative from falling apart for the rest of the year. All bets are off in 2026, however. The hundreds of billions of dollars spent on the AI buildout will increasingly dent cash flow and profit growth in the Magnificent Seven in the coming year. And there is little or no growth likely forthcoming from the S&P 493. A scenario that will be quite precarious for the market in the coming quarters.

At the time of publication, Jensen had no position in any security mentioned.