AI Angst - AI Prediction

Nvidia posted record results with solid guidance... then the stock sank. What is next with AI?

Nvidia: NVDA Stock 2023 - Present

Nvidia reported earnings Wednesday night after the bell. The company reported larger than expected revenue and profits beating across the board. Where it missed was easing concerns for investors. The next trading day saw NVDA stock sell off 5%.

The chart above shows where the “AI Trade” has moved, and where it is at the moment. In 2023, OpenAI announced its conversational search engine. Because Nvidia’s chips power the lion’s share of the AI foundation, during the following two years, NVDA stock moved from ~$40 in 2023 to over $200 in 2025.

Now, however, the concerns are growing that the OpenAI deal Nvidia is putting together have stalled, AI stocks are overpriced, software companies may see their hegemony be eliminated by AI’s possibilities, circular investments are unstable for the entire industry, and just maybe AI could actually be bearish for the economy.

While my main focus is on economic data and how that will show a roadmap to where the stock market moves next, the AI trade may be more important than where the economy may be moving.

Looking at the NVDA chart above, one can see that the stock has stalled lately. I want to point, however, that just maybe it is time for NVDA stock to move lower, and with that, likely we see the entire bull market correct.

NVDA Valuation

S&P 500 Forward P/E Ratio

What is NVDA stock worth? Starting with back-of-the-napkin mathematics, Nvidia should return some $8.29 for investors during the coming year. What should investors pay to ‘earn’ those forward earnings? According to Y-Charts, the market is paying ~23.80 for forward earnings across the board for the S&P 500. If this were a solid gauge, NVDA stock would be trading at $197.30.

A look at the valuations for NVDA moving beyond this year’s forward P/E ratio start to make Nvidia stock look frothy, and with that the broader AI Trade.

Consider using a Discounted Cash Flow (DCF) statement to value NVDA stock—A DCF would calculate the price of what an investor should pay for NVDA stock ownership based upon an approximate 10 year calculation. A DCF would take the total amount Nvidia would earn in revenue and profits, and discount that amount for an investor to today’s price based upon other investment opportunities.

If you looked at ownership in Nvidia from a longer-term perspective, NVDA stock might be a better buy at $100.00. The problem is that while Nvidia continues to increase revenue and profits at a sizable rate, expectations are that this rate declines significantly to more natural levels in about 2 - 3 years after companies reach scale.

This is concerning in that NVDA stock has been the real heartbeat of the AI Trade. If Nvidia stock were to fall, consider all of the others that might follow suit.

Circular Investing

There are concerns about circular investing that are warranted, such as large AI companies investing in smaller startups, then those startups turn around and use the very same funds to purchase cloud services from the bigger, partner companies. What happens if these smaller startups never progress to larger scale, and are forced to turn back to these larger investors for even more funds? That systemic risk could perpetuate.

Beyond that, even the bigger firms have yet to materially grow their top line revenue despite hundreds of billions being spent on the infrastructure. Potentially, sizable and sustainable profits from the massive investments may not materialize. More likely, profits will show up, however they will take a much longer period of time to materialize.

Could AI Be Economically Bearish?

Everyone has seen the potential headlines that AI will, not if, come for their job. I am dubious on this as I believe that AI will augment jobs, but not necessarily replace them en masse. In my own research, I am gearing up to do more with AI, but I cannot foresee a potential situation where mass layoffs occur. Instead, I see more depth and focus, and higher productivity, but that employment gains will materialize in the long run. Still, there will be shifts from the start, and already headlines have been printed indicating this.

What about Iran?

I do not see the war with Iran turning into a major regional outbreak, and even if it did, Iran simply does not possess the resources nor the allies to last long. Oil will not be permitted to stop flowing through the Straights of Hormuz, that is one absolute that the world would not be able to tolerate. Mostly, I believe this will be contained.

AI Prediction

I placed a trade in January that the stock market would not move too much, but if it did, down would be the most likely direction. I did well through the trade, but the market really did not move anywhere, actually.

Now, I am considering placing the same trade this week now that Nvidia has reported, and earnings season is generally over. My belief is that the economy will continue to expand at a slower and slower pace, and that employment will moderate. More, I believe the AI Trade will take a hit and these stocks will start to sell off quickly.

Given the latest news and Nvidia’s earnings, let’s see what AI thinks of the AI Trade potential.

The Query

I want to focus more on the AI trade. Last week, Nvidia released its earnings. NVDA stock performed poorly the next day and thereafter, but has since leveled out. Given the circular investments of the main AI players, the investments of larger companies into smaller startups, only to have those smaller companies pay for services to the larger investors, and overall potential bearishness of AI for the economy as individuals are likely to be laid off, how does all of this play out? What do you predict with AI companies and their revenues, how employment may eventually be affected by AI, and the stock market given these likely scenarios?

The Response

Good — now we’re getting into the structural plumbing of the AI trade rather than just price action.

You’re pointing to three real concerns:

1. NVDA earnings reaction despite strong numbers

2. Circular capex / revenue recycling within AI ecosystem

3. Long-term labor displacement risk

Let’s unpack them in layers: short-term market mechanics, medium-term revenue durability, and long-term economic impact.

1️⃣ Why Nvidia Can Beat and Still Sell Off

This is classic late-cycle leadership behavior.

When a stock:

• Has become the primary macro expression

• Is heavily owned

• Is priced for acceleration, not growth

Then:

“Strong” is not enough. It must be “stronger than trajectory.”

What likely happened:

• Revenue beat ✅

• Guidance strong ✅

• But incremental acceleration slowed ❌

• Or margin trajectory plateaued ❌

That’s not bearish structurally. It’s multiple compression without narrative break.

Leveling out afterward tells you:

• No institutional exit stampede

• No earnings credibility break

• Just position recalibration

That’s consolidation behavior, not topping behavior.

2️⃣ The Circular Investment Problem (This Is Real)

You described it correctly:

• Hyperscalers invest in AI startups

• Startups spend capital on hyperscaler cloud

• Chip vendors sell to hyperscalers

• Hyperscalers resell AI tools

• Equity ownership overlaps across ecosystem

It creates:

• Revenue amplification through ecosystem recycling.

The risk is not fraud. The risk is demand circularity.

The key question: Is AI spend being funded by: A) End-user monetization
B) Or venture capital / balance sheet subsidies?

Right now it’s a mix.

But here’s the important macro distinction:

If hyperscaler AI capex is funded from:

• Operating cash flow

• Not debt issuance

• Not speculative leverage

Then the system is self-financing.

And that appears to still be the case.

The real danger would be:

• Startups collapsing

• Hyperscalers cutting capex sharply

• Enterprise clients delaying AI integration

We are not seeing that yet.

3️⃣ Revenue Outlook for AI Companies (Next 6–12 Months)

I’ll divide this into tiers:

Infrastructure Tier (NVDA, chips, networking)

Near-term:

• Growth moderates

• Still elevated vs history

• Margins remain strong

Revenue likely:

• Still positive

• But decelerating from peak growth rates

Market reaction:

• More sensitive to guidance

• Less tolerant of misses

Hyperscalers

AI is:

• Increasing capex

• Increasing revenue

• Compressing free cash flow temporarily

But monetization is improving.

Revenue impact:

• Slower, more stable growth

• AI embedded into enterprise SaaS pricing

Less explosive, more durable.

Application / AI-native Companies

This is where risk lives.

Many:

• Trade on TAM narratives

• Not profit durability

Expect:

• Dispersion

• Some collapse

• Some consolidation

• A few durable winners

Just like 1999–2002 — but without the leverage bubble.

4️⃣ Employment — The Big Question

Right now: AI is augmentative, not displacing.

Historically: Technology affects employment in three waves:

1. Productivity boost without layoffs

2. Hiring slowdown

3. Gradual role elimination

We are still in wave 1.

If displacement comes, it likely shows up as:

• Lower hiring velocity

• Not mass layoffs

Which means:

• Payroll growth slows

• Wage pressure softens

• Corporate margins improve

That is ironically: Bullish for equities initially.

Only later does:

• Consumption weaken

• Political pressure rise

• Regulation increase

That’s multi-year, not 2–5 months.

5️⃣ Is AI Bearish for the Economy?

Short-term: No
Medium-term: Neutral to mildly positive
Long-term: Depends on distribution effects

Why?

Because productivity shocks:

• Lower unit labor costs

• Support margins

• Support GDP

But: If labor displacement outpaces wage growth, you get demand weakness.

We are not there.

6️⃣ Stock Market Implications

Here’s the most important distinction:

The market doesn’t care if AI replaces jobs. It cares if:

• Earnings grow

• Liquidity holds

• Discount rates stabilize

Right now:

• Earnings still growing

• M2 positive

• Inflation drifting lower

• Fed on hold

That’s not bearish for equities.

7️⃣ Where AI Stocks Likely Go (2–5 Months)

Base Case:

• Volatile consolidation

• No collapse

• Rotation periods

• Leadership narrowing

Bull Case:

• Inflation continues drifting lower

• Real yields ease

• NVDA and peers reaccelerate

Bear Case:

• Capex guidance cuts

• AI monetization stalls

• Real yields spike

Probability-weighted: Consolidation with upward bias.

8️⃣ The Bigger Structural Question

Is this 1999?

No.

Because:

• No systemic leverage explosion

• Cash-rich megacaps

• Real revenue growth

• No widespread retail mania comparable to dot-com

But we are in: Late-cycle multiple sensitivity.

Which means:

• High-quality AI leaders survive

• Marginal players get repriced

Final Synthesis

Over next 2–5 months:

AI revenues:

• Continue growing

• Decelerating but strong

• Infrastructure solid, apps selective

Employment:

• Hiring slows before layoffs rise

• Wage growth cools gradually

Market:

• Broader index stable

• AI volatile but not structurally broken

The AI trade is transitioning from:

“Narrative expansion” to “Earnings validation phase”

That phase is choppier, but not necessarily bearish.

My Take

On Friday, after the Nvidia release calmed down, I went ‘short’ the S&P 500 via selling out-of-the-money vertical call spreads, then buying out-of-the-money puts. The world woke up to a different world on Saturday as the United States launched a war against Iran. Market sold off somewhat Monday, but then fell sharply on Tuesday. I bought back my vertical call puts as they were in-the-money and took profits on those—it was a gift I could not pass up so rapidly. I tried to get out of the calls, but the spread never hit my offer. As this market continues to trickle back upward, I will repurchase the puts again. Mostly, the stock market has not moved from its original position, and everything appears to be stuck at eh same levels. I do not see any real reasons for their to be any rallies as of right now. Inflation prices heated up with PPI on Friday, and this will continue to keep a lid on the Fed moves. With potential shipping disruptions through the Straights, and other disruptions within the region, I just don’t see rallies happening.

With that, AI said some things about NVDA that while there are concerns, mostly the stock is consolidating. The report was astounding, and yet NVDA fell 5% the next day—how much more would it take? On some level, I can see the market getting weary on the AI trade for now, but not exiting for any real reason.

These are the reasons I will remain short in some capacity or another. If I can get back into my long vertical puts, and then we see moves lower, I will either take profits again, or simply sell overnight positions versus the longer-dated long position to continue to bring in premium.

Eventually, however, it is possible that the market, which is near all-time highs, just might capitulate to AI angst and the new war. If I can get back into the long vertical puts, and they go back into the money, I will take those profits and likely step back to reassess what may be next with the AI trade and geopolitics.