TS Lombard advises against trying to time when the AI trade collapses
TS Lombard believes the AI bubble will pop, and says investors have some simple ways of protecting themselves.
Fears about an artificial-intelligence bubble popping are far from fiction, according to TS Lombard strategists. In fact, they say "the crash is coming."
"The only question is what to do about it," wrote Dario Perkins, global market strategist at TS Lombard, in a recent report to clients. In a nod to Citrini Research's AI doomsday report that went viral at the start of the year, he laid out a multiyear fictional look at the before and after of that bubble bursting.
Perkins envisaged an investor in 2030, looking back on 2026 as the year when things started to look a bit rotten below the surface. Hyperscalers were spending and flooding the AI ecosystem with cash as chip giant Nvidia (NVDA) was leading circular investing, investing in its customers to get them to buy more chips.
Those hyperscalers were also starting to fund build-outs with special-purpose vehicles that were off the balance sheets, and leverage started to explode. Model developers Anthropic and OpenAI were still pretty secretive about the state of their finances, and concentration became another worry.
"The entire trade was an act of faith, with just $200 billion in current revenues supporting more than $1 trillion in future commitments from just two companies," wrote Perkins. That came as the public began showing a lack of interest in AI.
The vibe really shifted toward the end of 2027, he continued, as OpenAI's much-delayed initial public offering did not get the same benefit of the doubt as Anthropic's a year earlier, as investors started to take a hard look at the numbers.
"Meanwhile, people were starting to think about the 2028 U.S. elections and the one issue that did unite Americans - anti-AI sentiment," according to Perkins. "It was clear a political/regulatory backlash was coming."
The bust began in early January 2028, when hyperscalers stopped investing, slashing capital-expenditure guidance by 45% to around $600 billion and driving a 10% slump for stocks in a week.
"For everyone downstream, lower hyperscaler capex became a revenue cliff. Orders at chip, server, construction and power-equipment suppliers suddenly halved, and the export-led economies that had supplied them - Korea and Taiwan - were hit hard," he wrote.
By April, the S&P 500 SPX was off 30% from its peak, AI-linked stocks were down 40% and the rest of the market down 20%, with $20 trillion of U.S. financial wealth now up in smoke. By now, AI technology was freely available "and most regular people weren't that fussed."
As a bear market set in, investors began grilling AI balance sheets and leverage, neoclouds filed for bankruptcy, loans on data-center projects saw write-downs, a cloud provider was cut to junk and banks were left holding debt. Hyperscalers became slower-growth assets and some lenders faced billions in losses.
As for the economy, the AI bust wiped out 500,000 lost jobs in nonresidential construction owing to the bust of AI infrastructure, and Asian supply chains were it hard. A recession followed, but a mild one based on history, with AI debt not systemic and some tech-related defaults. Central banks began cutting interest rates aggressively by mid-2028.
Rate cuts helped housing, residential construction and consumer durables to turn around within a few quarters, and a stock-market mania was then replaced by a housing boom. Postbubble, businesses figured out how to get AI to make businesses more productive, but it didn't replace labor. The "technology itself became highly commoditized, thanks to open-weight models that made intelligence cheap, squeezed margins at the model layer and shifted the value to infrastructure, applications and users."
As for advice from TS Lombard on how to brace for a bust that they are convinced is coming, Perkins said timing that is fraught with difficulty and exiting those investments too early could mean losing money for years. "The canary in the coal mine is not the problem, it's the mine itself that is," he said.
Hedge funder Ken Griffin, who owns market maker Citadel Securities, appeared to echo that comment recently - saying that while AI stocks are probably in a bubble, they are still worth holding on to.
"Our advice is more modest: Hold a normal amount of risk but protect yourself from the downside. In practice, that means a diversified portfolio of global stocks, with less of the AI complex than the index hands you," wrote Perkins.
"This is not like dot-com, which spread across the developed world, Europe included," he added. "This time, the bet is concentrated in U.S. tech and an Asian hardware supply chain, so most of the rest of the world should fare better - eventually. And add duration as the vulnerabilities appear, because bonds are what rallied."
Need to Know: The stock market's biggest test in weeks is here
-Barbara Kollmeyer
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