Last week’s tech pandemonium explained…why Alphabet and Amazon’s spending shocked Wall Street…the transition from Stage 1 to Stage 2…which stocks face an existential threat from AI…and how Louis and Luke are positioning themselves for winners
Last week was quite the rollercoaster for tech investors.
Early in the week, big tech stocks took a nose dive. The S&P 500’s software and services sectors lost around $1 trillion in market value. Companies that seemed untouchable just weeks ago—like Microsoft, Salesforce, and ServiceNow—saw significant declines, with the tech-heavy Nasdaq down about 4% by Thursday.
Then came Friday…
Tech firms rebounded with a huge rally, managing to recover much of this week’s loss by the time Monday rolled around. It seems technology is, at least, making a comeback.
This drastic up-and-down experience has left many investors feeling a bit lost, prompting the question, “What’s really going on?”
Here’s the situation…
The market appears to be assessing who the winners and losers are in real time, as AI transitions from being a novelty to a standard infrastructure.
This shift is chaotic and unpredictable, but it opens doors that many investors might overlook.
Spending that sent Wall Street into a panic
Last week kicked off with a double whammy of astounding capital spending announcements.
On Tuesday, Alphabet (Google) disclosed its fourth-quarter earnings, revealing it racked up $13.9 billion in capital expenditures for that quarter alone. However, what really threw investors was management’s projection of nearly doubling capital spending—from $91 billion in 2025 to between $175 billion and $185 billion in 2026.
Then on Wednesday, Amazon announced plans to increase its capital spending to $200 billion in 2026, which was about $50 billion more than analysts expected.
These revelations brought the anticipated total spending by the top five hyperscalers to around $710 billion by 2026—nearly $2 billion a day flowing into data centers, chips, power systems, and networking infrastructure.
What was Wall Street’s reaction? Panic.
Why? Because investors are starting to ask questions that should have been on their radar a while ago…
Are the gains from this spending spree really worth it?
Last week, savvy investors largely concluded “no,” leading to a sell-off that was brutal.
Notably, investor Louis Navellier pointed out:
As I write this this week, Alphabet, Amazon, Meta, and Microsoft have collectively lost more than $950 billion in market capitalization.
Louis elaborated on why this is happening:
The market is starting to redefine what we care about right before our eyes.
The focus is shifting from “Can we build this?” to “If we do build this, who will benefit?”
What fearful investors are missing out on
Indeed, shareholders in Big Tech should be asking tough questions regarding their piece of the $710 billion pie. If you are holding stocks from the ‘Magnificent Seven,’ this inquiry is not just valid but crucial.
However, if you only concentrate on this aspect, you might miss the bigger picture.
That $710 billion is leaving the hyperscalers but is essentially windfall cash flow entering an entire ecosystem of companies creating the tools needed to build this AI.
This is what Louis refers to as the “second phase” of the AI boom—where the focus pivots from the well-known giants to smaller, less visible companies ready to capitalize on this infrastructure spending.
Louis further states:
As big tech stocks struggle under spending anxieties, another group of stocks is thriving amid this earnings season.
I’m referring to smaller and medium-sized businesses that produce the machinery, components, and infrastructure necessary for AI computing, along with companies adept at applying AI for profitability.
Luke Lango, our technology expert, aligns with this perspective. Here’s what he shared in last week’s Daily Note:
Yes, there’s a legitimate concern over ROI for hyperscalers. Yes, investors are anxious.
But the reality is that this money will be spent regardless.
And all that cash is headed somewhere: chips, servers, networking, power systems, cooling, metals, optics, memory, software plumbing, etc.
In essence, AI supply chain stocks are poised to benefit.
If your business is selling brick-and-mortar goods in this era of AI, times have never been better.
While Wall Street sulks over Big Tech’s “Stage 1” expenses, companies in “Stage 2”—those supplying the infrastructure for AI—are likely to experience unprecedented demand.
What investors need today – insight
However, not all tech stocks are sharing in this transition’s benefits.
While leaders in AI infrastructure may capture the financial tailwind, other tech stocks are facing a very different reality.
Last week, software and data services firms were heavily impacted. Recalling Louis, here’s his take:
The S&P 500 software and services group has plummeted, erasing about $1 trillion in market capitalization since late January.
What has changed?
As AI tools advance rapidly, investors are increasingly wondering whether these legacy software models will withstand the pressure from new AI-driven alternatives that can replicate essential functionality more efficiently and inexpensively—or replace it entirely.
This may just be the start of a broader and more painful market evolution. Recently, Brian noted what he dubs “KIDS” businesses: firms centered on Knowledge work, Information gathering, Data analysis, and Software.
He warns that AI isn’t just competing with these companies; it could render them obsolete.
If the business thrives in the KIDS space, then AI could pose a grave risk.
If someone utilizing AI can create a product or service, any associated business faces a threat…
AI is likely to push some of these KIDS companies out of the market. Remember, you don’t always have to put them out of business to make them underperform in the stock market.
Over time, AI will likely drive down production costs, which will significantly impact growth, profit margins, and P/E ratios.
The so-called KIDS stock slump is severe. FactSet has dropped 54% over the past year. Morningstar is down 47%. Equifax has seen a 28% decline.
This isn’t just about a few small businesses having tough quarters. It’s a whole segment of business models being revalued for an AI-focused world.
Connecting the dots – and what to do about it
Bringing it back to the initial question…
What is actually happening here?
Last week wasn’t about the market rejecting AI. No, it’s not a small puncture to pop the so-called “AI bubble.”
What’s occurring is that Wall Street is increasingly distinguishing between AI winners and losers.
And let’s be clear: The current distinction isn’t about whether a company is strong but rather which one is a sound investment based on its place in the AI supply chain and the significant capital investment flowing from hyperscalers.
So, how do you discover these promising investments?
Luke suggests starting with the following areas:
- A company that offers power supply systems for data centers
- Networking infrastructure capable of handling AI-scale data throughput
- The memory technologies powering these large computing clusters
- Building this infrastructure also requires metals such as copper, silver, and platinum.
Additionally, he pointed out some specific names:
- Arista Networks (ANET) – A part of AI’s high-speed network
- Eaton (ETN) – A key player in power grids
- Broadcom (AVGO) – A giant specializing in chips
- Vistra (VST) – Traditional utilities positioned to benefit from AI’s energy needs
Louis, on the other hand, focuses on a small number of “Stage 2” winners through a specific grading system.
He recently held a special briefing called AI dislocation—conceptualizing the shift from Stage 1 megacap stocks to Stage 2 infrastructure and applications.
In that session, he outlined why fears surrounding Big Tech’s spending open up opportunities elsewhere and how he identifies fundamentally strong companies poised to seize this spending.
These aren’t household names. They are smaller firms boasting solid fundamentals, reasonable valuations, and are directly tied to the infrastructure they’re building, regardless of Microsoft’s stock fluctuations.
According to Louis:
These setups have historically led to the highest returns—not due to flashiness but because expectations remain low despite rapidly improving fundamentals.
If you’re trying to wrap your head around the chaos of last week and want to see where the real opportunities lie today; a roadmap will be provided at Louis’s free briefing.
Conclusion
The AI boom certainly didn’t end last week.
It was Wall Street’s increasing realization of the new direction the boom is taking, transitioning from hype to actual infrastructure.
Yet, this moment could also serve as a useful assessment. If your portfolio took a hefty blow last week, it could indicate you’re still entrenched in the first phase of the AI boom and may be susceptible to the disruptions termed by Louis.
Be cautious, especially with those KIDS companies that Brian brought up. These firms have been contending with shrinking margins for years as AI drives down production costs.
But if you know where to focus on Stage 2 stocks, be aware that despite the current volatility, the market still retains immense potential.
We’ll keep you updated with the latest insights.
Good evening,
Disclaimer: I hold shares in GOOGL and AMZN.
