AI Stocks Took a Hit. Here's How to Respond Without Panic
AI names have been a quick path to gains for two years. But the last few days reminded everyone that price matters. Valuations stretched, bubble talk picked up, and the market reacted.
Palantir dropped 11% on the week despite strong earnings. Nvidia fell 7% while demand signals across tech stayed firm. The Nasdaq logged its worst week since April after tariff headlines rattled risk appetite.
Yes, stocks look expensive. The S&P 500's Shiller CAPE ratio sits near historical extremes, which raises the bar for future returns. If you want context, track it here: Shiller CAPE ratio. But elevated valuations don't automatically mean AI is headed for a crash. Big Tech just posted strong numbers, and a lot of it came from AI-driven demand.
1) Favor diversification
Audit your portfolio. If you're overloaded in one theme-AI or anything else-trim and spread the risk. Reallocate a slice of gains to defensive areas like pharmaceuticals or stable dividend payers. People need medicine in any economy, which supports steadier earnings and helps smooth volatility.
- Set a max position size per stock or theme (example: 5%-10%).
- Balance growth with defense: AI + healthcare, staples, or utilities.
- Reinvest trimmed gains with a rules-based approach, not gut feel.
2) Pick established players with clear paths to cash flows
AI demand hasn't slowed. Cloud providers are seeing more AI workloads, and chip capacity remains tight. Favor companies with scale, moats, and consistent execution-names like Nvidia on the chip side and Amazon (AWS) in cloud.
Even if they pull back, they have the balance sheets, customer bases, and product pipelines to recover and compound. Be selective with early-stage stories that rely more on narrative than fundamentals.
3) Stretch your time horizon
Volatility tests conviction. You haven't booked a loss until you sell. Indexes have recovered from far worse drawdowns over time, and quality businesses typically follow earnings higher.
Recheck the thesis for each AI holding. If the long-term story still holds, stay put. If a position grew too large, take profits and diversify. Pullbacks can also be a chance to buy quality at a discount-set target ranges and act with discipline.
Weekly checklist
- Rebalance to your target allocation (by sector and position size).
- Write or update a one-page thesis for each core holding.
- Define buy/sell zones based on valuation and risk.
- Schedule a 30-minute review to keep decisions rule-based.
Want an edge on AI from a finance POV?
If you're building skills to evaluate, implement, or speak fluently about AI in finance, these resources can help:
The takeaway: respect risk, keep cash flow in focus, and think in 5-10 year windows. That's how you stay in the game long enough to let compounding do the heavy lifting.
Your membership also unlocks:
