- Putting cash in the market's biggest stocks could be a big mistake, investing vet Bill Smead said.
- Smead pointed to comparisons between the current AI mania and the dot-com bubble of the 2000s.
Betting on the biggest, most popular stocks in the market could be a mistake, and the boom in artificial intelligence stocks probably won't end well for investors.
That's according to Bill Smead, a 40-year market veteran and the founder of Smead Capital Management, who's been warning that the stock market faces a major risk of "failure" as investors get carried away by their excitement for AI.
Those risks appear to be lost on market bulls, who have been plowing their cash in the Magnificent Seven stocks and riding the S&P 500 to record highs.
Investors appear to be comfortable with the idea that the stock market now is different from previous bubbles, but that's always that rationale that precedes a major correction in the market, Smead warned.
"It is always different this time and it is the rhyme with prior manias and top ten lists that sends you to purgatory. How did the Go-Go 1960s and Nifty 50 stocks work over ten years? How have Cisco and Intel done since 2000?" Smead said in a note on Tuesday.
The Nifty Fifty, a group of large mega-cap stocks that dominated the market in the 60s and 70s, ended up plunging in the 1973 market crash. Similarly, Cisco and Intel, two of the hottest stocks during the dot-com craze, ended up wiping out more than half of their value when the dot-com bubble burst in the 2000s. Cisco did not fully recover until 2019.
Other market commentators have been warning of the similarities between Wall Street's AI mania and the dot-com bubble, which eventually sent the Nasdaq falling 78% peak-to-trough.
Even if markets currently aren't as overpriced as they were during the dot-com bubble, they could still be in for a significant fallout, Smead suggested.
"This comparison is like a fraternity brother feeling comfortable drinking 14 beers because his best friend knocked out a whole case," he said of the parallels between 2024 and 2000.
Smead has been one of Wall Street's loudest bears. Previously, he told Business Insider he saw the most popular stocks on the market plunging as much as 70% in value over the coming years.
"We have no urge to go through purgatory with popular stocks that lead to long-term heartache. This mania appears to be headed to a bad ending. As always, fear stock market failure," he added.