Goldman's Warning: The AI Bubble is Bursting… But Keep Buying

Goldman Sachs just sounded the alarm on its trading desk warning that carnage could be about to hit the stock market. But despite this internal memo, they're still telling their clients to go out and buy tech. So is the bubble about to burst? And how should we be positioning if we don't want to be on the wrong side of another trade that could take years to recover from if it goes south? I'm James Helliwell. I'm a former professional trader. And in this video, I'm going to give you my honest take on what's really going on. The risk to your portfolio, and how I'm positioning right now. But first, some context here. The public weren't meant to know about this. It was an internal memo sent by one of Goldman's senior traders. They're seeing this carnage in an area of the market directly linked to AI, corporate bonds to be exact. Now, if there's one thing to know about the bond market, it's that it rarely overreacts. So when there's carnage, we should probably pay attention. Because what's happening is that the biggest investors are now all scrambling to get out of these bonds. And these are the same institutions who only a few weeks ago, in the case of the SpaceX IPO, were willing to lend billions to these companies via their bonds. But that might have just been the peak, because now they're all heading for the exit in a hurry to sell these bonds and move the risk onto anyone else stupid enough to take it on. And that's where this story gets really interesting, because not only is the stock market seemingly oblivious, with the S&P basically having gone sideways for the past few weeks, but Goldman is still telling their clients to buy the very companies sitting at the center of this AI spending boom. And in case you weren't aware of what they were doing, Companies like NVIDIA, they've been investing millions of dollars into startups who in turn have been buying NVIDIA's chips. They've been able to grow their revenue when really it was the same money just handed back to them. Cloud companies like Google, they're also doing it with their investment in Claude Anthropic, for example, using a significant portion of that money then to go back and buy Google's cloud infrastructure. It's hard to tell how much natural demand there is, how much of it is coming from genuine customers, and how much of the earnings story is being inflated by borrowed money, which bond investors are all of a sudden backing away from. Now I think it shares many of the hallmarks of the subprime bubble that led up to '08, which in fact saw Goldman find $550 million for pushing that stuff onto the clients when they were privately trying to get out of that trade. So if we can't trust what the analysts are telling us, where should we be looking instead? Now that's where my model comes in because it doesn't run on the headlines, it looks at what the market is actually doing. So let's see whether the funds are also rotating away from those tech stocks and into something else as Goldman would, well, on one side of the trade, have us believe. So there'll be a link to this tool in the description below if you want to try it out. You can also get access to a bunch of the others that I've built here. This shows us like a scatter plot of the sectors that are leading the market, lagging the market, and then rotating somewhere in between. It's a bit like a clock where it goes round and back through again. So we can see that tech is actually down between weakening and lagging, and that's quite a surprise. Because by all accounts, this was going to be something that was coming as a big nasty shock to the market. But it seems that the pros have in fact been cycling out of tech now for a number of weeks. If I pull up a chart on TradingView, you can see it more clearly. So we'll pull up XLK for the tech ETF compared to the S&P. So this is the ratio. It has begun to fall. So this would be going back to really the beginning of June. Which coincidentally is also when the S&P overall started to go sideways. So it might sound like it confirms the warning that's been flashing in the bond market, but that's not the full story because looking at tech as just one sector misses what's happening underneath. And the same funds that avoided the software sell-off earlier in the year are beginning to question the consensus once again. So should we abandon what's been working and look to take profits here, or is a rotation just as risky if we're still early? And to do this, we're going to compare a couple of really important industries within the tech space. So the best place to start is with a chart of the Software Industry ETF, and it's actually the sell-off here that I want to bring your attention to. This is when a trillion dollars was wiped off the market cap of software companies almost overnight. And you can see that software massively underperformed semiconductors. The chip stocks were winning because AI was gonna replace software, because now we've all got access to Claude Code, things like that, and businesses were suddenly going to be worthless overnight. If there were platforms or in software. Now what I want to bring your attention to are the fundamental profiles of some of the companies in this sector. So ASML is a Dutch photolithography specialist, which is quite a mouthful. It's one of the best performing stocks, I think up about 75% year to date within the big AI names. And you can see the chart here at the bottom, but more importantly the fundamental profile at the top. We're always skipping ahead to charts, but here we go. We need to eat our greens, and in this case, there's a lot of green. The fundamental strength of this company is almost unrivaled. However, if we turn our attention to the valuation, it has historically traded at 35 times free cash flow. So that's the best point of reference for us to compare the current valuation to. It just released mega earnings again, literally in the last 24 hours. So had that not have taken place, or if we were making this video just a day earlier, it was in fact trading up over 70 times, double its historical valuation, guys. And with bond market signals flashing a big warning sign, this is exactly what's making investors somewhat concerned. Now on the other side of that, let's go ahead and look at one of the companies that otherwise has a great historical track record but unfortunately is in the software industry, and that's the maker of the accounting software QuickBooks. The company is Intuit, and you can see that within my screener we've got this flagged as having AI risk. Let's pull up the chart. This is not obviously an isolated case. There's a bunch of other stocks within IGV or the software ETF that have been basically marked for death. You'll see that it's trading at less than 10 times free cash. Now that's not even one-third of the historical median, so we're now at like 15% of peak valuation, which is absolutely insane for a stock with a profile like this. The risk, of course, being that AI could just suddenly make that track record completely redundant. And it's really this extreme here that we've yet to see a recovery from. Now, while everyone still assumes that it's going to be the chipmakers that are the obvious winners here, when you look at what you're actually paying, you can see that one of these names is priced for absolute perfection, and the other, in Intuit, has been priced for death. But rather than trying to pick a winner here, we could just own both. And I know that might sound a bit weird given that we've just dissected the fundamentals, but as I see it, if AI keeps winning, then software might go to zero, but on the other side of that, ASML would more than likely double and then some. But if the consensus is wrong and AI doesn't take over the world, then software would surely rally, and at less than 10 times free cash, Intuit might well double on a re-rating. So either way, the gains would likely offset the losses on the other leg, and you're not having to bet on which one's right. Now, I personally quite like that setup, but there's one problem here still, because a rotation and a top, while they're forming, look identical for the first few weeks. And everything we've just looked at assumes that money is going to stay inside equities. But what if it isn't? And what if this is the start of something bigger? So let's zoom out for a minute, out of tech and out of equities entirely, and now use that rotation tool again to look across all of the major asset classes at once. Because if the money's genuinely heading for the exit here, this is where it will show up. So what we can do here is click on the risk tab. Now this shows us risk-on and risk-off asset classes, so safe havens for example, that money tends to flow to when there's a big problem within equities. So these moves are all relative to the S&P. Now I'm just going to toggle these off for now and put the defensive havens of cash, treasuries, and also the yen in here, which tends to be a very good signal for risk-off. They appear to be heading in the direction of improvement and potentially crossing over into leadership. But what we can also do is look at factors. The money has been cycling into defense, for my American friends, and away from the risk-on stuff. But there's still been a bit of a retracement looking at the last couple of data points. Not quite a confirmed signal as yet. But let's take a look at currencies as well before we finish off, and maybe also commodities. Now the idea being that the dollar, cash as a position, if we just go back to risk sentiment, has been up towards leadership. But is there a better currency to hold? Well, most of them are actually down in lagging, with the exception of the good old British pound. We might have lost the football to Argentina, But I'm not going on to say the other thing, that would get me cancelled. We are seeing our currency perform relatively well, so perhaps instead of otherwise sitting in cash— cash being US dollars by default— we could potentially look to own the pound. Now of course none of these are trade recommendations, I'm showing you the money flows within the various markets, but there does look to be a setup here and potential for the pound to assert some relative strength. So just lastly, let's have a look at commodities because you've got things like gold in here, a traditional inflation hedge and also safe haven. We've also got agricultural commodities in here as well as the metals. And it's actually the ags that stand out within leadership— wheat, soybeans, and corn. Let's take a look at the ETF. This is really interesting, the absolute price performance. Looks to have perhaps bottomed out here. So there's a couple of things there worth keeping an eye on. Maybe sterling, maybe wheat. I think the smart move might be to do less for now, to watch the market carefully and try and wait for a better signal using these indicators. But if you're already sitting in cash and you'd rather put your money to work for the long run, then watch this video next where I rebuild my £2 million portfolio from scratch with companies that you can hopefully hold forever. See you in the next one.