How to Invest If You Think the AI Market Sell-Off Could Get Even Worse

Things have been rough for the AI trade lately, and there’s a chance the sell-off could worsen.

Some analysts and investors think that this week’s rout that brought the Nasdaq 100 down by more than 6% could be a taste of more pain to come, even as markets were attempting to recover on Friday.

“The shakeout in AI-related stocks has much further to run,” said Phillip Colmar, a global strategist at MRB Partners, in a note on Thursday.

Colmar highlighted the risks still facing AI stocks that inform his bearish view: questions around AI monetization; elevated borrowing costs; public backlash to the data center buildout; shaky financials of AI giants like OpenAI and Anthropic; AI agents posing security

“To the extent that these concerns intensify, they will put downward pressure on the valuations of tech companies, make it more difficult for the weakest borrowers to service their debt, and ultimately put the revenue commitments that the various components of the A.I. ecosystem have made to each other at risk of not materializing.”

Here’s how investing pros are saying to position your portfolio if you are worried that the AI sell-off will get worse.

High-quality stocks

Michael Kantrowitz, the chief US equity strategist at Piper Sandler, said the election results reinforced his view that investors should continue moving up the quality curve.

Quality by Piper Sandler’s definition emphasizes high return on equity, high free cash flow yield, return on invested capital, return on assets, and high interest coverage.

The bank’s Macro Select model filters for these characteristics. In a client note on Thursday, Kantrowitz shared the highest-rated tech-sector stocks in the model.

If you still want exposure to the tech trade in some way amid the sell-off, Piper’s favorite pick include: Gen Digital, Accenture, Manhattan Associates, Adobe, Jabil, F5, Gartner, NetApp, GoDaddy, Salesforce, Fortinet, Hewlett Packard, DocuSign, Workday, Nutanix, Zoom Communications, and SanDisk.

Non-AI value stocks

It’s no secret that Bill Smead, founder of Smead Capital Management, is a tech bear. He’s a value investor, after all, and his Smead Value Fund holds no direct AI exposure, he says.

His fund has fared well amid all the market chaos lately, up 6.8% since October 8 as investors have rotated out of the AI trade.

With the AI trade likely to unwind further in Smead’s view, he said he’s leaning into homebuilders like DR Horton, NVR, and Lennar, as their valuations remain cheap and sentiment around homebuilders is poor.

Unglamorous sectors of the market

Eric Teal, chief investment officer of First Horizon Wealth Management, said he sees opportunities in some of the more unglamorous corners of the stock market, like small caps, financials, and energy.

“Today’s sharp market pullback underscores the importance of looking beyond large-cap technology stocks and taking a more diversified approach to investing,” Teal said in an email.

In a client note on Friday, UBS gave a similar perspective. The bank said its preferred stock sectors right now include healthcare, financials, and industrials.

Load up on bonds

UBS thinks the AI trade is eventually going to bounce back, but if you feel that you need more protection in the event of more near-term volatility, the bank said to consider upping your bond allocation if you’re underweight the asset class.

“We see attractive diversification and income potential in fixed income, particularly in high-quality bonds with short- to medium-term maturities and in emerging market bonds,” the bank wrote in a note.