How to profit as the AI bubble deflates for many companies in the stock market

MW How to profit as the AI bubble deflates for many companies in the stock market

By Philip van Doorn

Also: Meta vs. Alphabet, two sides to Amazon, housing-market coverage and what to stream in November

The AI bubble has been deflating for many companies, aside from most of the hyperscalers doing the big spending as the infrastructure build-out continues to support generative-artificial-intelligence technology.

Stocks of AI hyperscalers have continued to rise, but there was one glaring exception among the heavy hitters this week. And there have been "mass casualties" among smaller companies developing generative artificial-intelligence technology, as Jurica Dujmovic explained.

He described "a slow-motion deflation" as a large number of generative artificial intelligence projects have failed and venture capital has dried up for some startup companies.

Dujmovic broke down AI players into three groups for investors to track in this detailed guide on how to make money in the stock market as the generative AI bubble's deflation creates investment opportunities.

More on the AI and/or stock-market bubble:

-- Here's how Nvidia's Jensen Huang answers the AI bubble question

-- 'Sometimes the only winning move is not to play,' says Michael Burry in bubble warning

-- This market analyst is an expert on stock bubbles. Here's what he's saying now.

-- The stock market is more overvalued than at almost any time in U.S. history - by virtually every measure

A different take: All four U.S. stock market indexes just closed at record highs. Here's what history says happens next.

Meta stood out this week

Here are ascending total returns with dividends reinvested for one week through Thursday for five AI hyperscalers:

   Company                  Ticker    One week return  2025 return 
   Meta Platforms Inc.      META                -9.2%        14.1% 
   Amazon.com Inc.          AMZN                 0.8%         1.6% 
   Microsoft Corp.          MSFT                 1.0%        25.4% 
   Apple Inc.               AAPL                 4.6%         8.8% 
   Alphabet Inc. - Class A  GOOGL               11.2%        49.2% 
                                                      Source: LSEG

Meta's stock declined more than 11% on Thursday after the company reported its third-quarter results and raised red flags with investors and analysts by increasing its estimate for capital spending for the third time this year.

Aftermath: Why Alphabet's stock looks like a better play than Meta's in the AI race

Amazon's feast and famine

Amazon.com Inc. announced 14,000 layoffs on Tuesday. On Friday, the stock was up as much as 12% after the company reported its third-quarter results.

Making heavy investments in AI might help a company grow its business. But part of the attraction for corporate managers is on the expense side. We are watching the bifurcated economy play out, with Amazon (AMZN) providing a prime example.

On Tuesday, Amazon Senior Vice President of People Experience and Technology Beth Galetti wrote in a message to employees that the company would reduce its head count by 14,000. She cited AI as a reason Amazon needed "to be organized more leanly."

Amazon's stock was down more than12% Friday afternoon following the company's third-quarter earnings results that were announced after Thursday's close. Quarterly revenue totaled $180.17 billion and was up 13% from the year-earlier quarter.

The company's operating income for the quarter totaled $17.42 billion, up slightly from the third quarter of 2024. That made for an operating profit margin of 9.7%, down from 11% in the third quarter of 2024.

But third-quarter operating income was impacted by a $2.5 billion charge tied to the company's settlement with the Federal Trade Commission over allegations that it made it difficult for customers to cancel Prime subscriptions. And there was another one-time charge of $1.8 billion to cover estimated costs for the layoffs announced on Tuesday.

Excluding those charges, Amazon's third-quarter operating income would have totaled $21.72 billion for an operating margin of 12.1%.

More coverage:

-- Amazon's stock soars toward its best day since 2022: 'The AI narrative has flipped positive'

-- The 'no-hire, no-fire' job market may have ended, as Amazon, UPS make bold layoff moves

The bifurcated AI economy can help you as an investor, even as it disrupts your career

Amazon's third-quarter operating margin (adjusted to exclude one-time charges) widened by more than 100 basis points from the year-earlier quarter.

According to data compiled by LSEG and updated Friday morning, the S&P 500's weighted trailing 12-month operating margin had widened to 30.25% from 29.12% during the previous 12-month period. If we look back another 12-month period, the index's operating margin was 27.1%.

According to Saturna Capital portfolio manager Dan Kim, this type of margin improvement reflects "staggering efficiency and productivity gains," as large companies deploy AI technology, even as many people have their working lives disrupted by the new technology.

"We are not in the latter stages of this AI rollout," he said. Here is Kim's strategy for taking advantage of AI productivity improvement as he co-manages the Saturna International Fund SSIFX SIFZX. The fund is rated five stars (the highest rating) within Morningstar's "Foreign Large Growth" investment category.

Tech insiders are bearish

Michael Brush covered seven stocks of companies whose officers and directors have been selling shares and cited data from Vickers Insider Weekly indicating that corporate insiders are now "more bearish than at any time since 1974."

More tech coverage:

-- Microsoft is defending its heavy AI spending with this buzzword

-- Should you buy Apple's stock after earnings? These analysts see better options.

Should she pay cash for a house or take a mortgage loan?

Aarthi Swaminathan covers the residential real-estate market. This week, she helped a retired reader who had sold her house three years ago and moved into an apartment. Now she regrets that decision and is planning another move. Should she pay cash for her new house or finance it with a mortgage loan?

More housing market coverage from Aarthi Swaminathan:

-- Plunging mortgage rates are spurring homeowners to refinance. Here's how to know if you should too.

-- Inflation is quietly chipping away at most Americans' main source of wealth

-- I'm struggling to buy a house - should I settle for one with a bus stop right outside?

Related coverage for investors: Home builders are struggling, and it's not just because new houses aren't affordable

Don't overpay or borrow too much for a car

Think carefully before signing a loan agreement at a car dealership.

Genna Contino has tips for car buyers: Here's how to avoid being pressured into a car loan that isn't right for you.

Seasonal advice:

-- Health-insurance premiums are soaring. How to tell if switching to a high-deductible plan during open enrollment is best for you.

-- Most Medicare Advantage plans are free upfront. You still might not be able to afford one.

The Moneyist considers marriage

Quentin Fottrell is the Moneyist.

This week, Quentin Fottrell - The Moneyist - provided advice to a 53-year-old woman who has never married but is now in a long-term relationship with a partner who wants to wed. Should she do it? There is a lot to consider, including her current financial situation and desire to help her daughter financially, as well as the potential for her husband to face large medical bills and incur debt for the married couple.

Here is the Moneyist's marital advice.

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How to profit as the AI bubble deflates for many companies in the stock market

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