The first wave of AI gains went to Mag 7, but the next opportunity may be shaping up in a completely different part of the market.
Hello reader.
Hollywood loves a “second chance” story.
This is not surprising It’s a wonderful life Ranks #1 on the American Film Institute’s 100 Years List… 100 Cheers to the Most Inspiring Films of All Time.
Reluctant hero George Bailey realizes the immense value of his existence with the help of his guardian angel. (Remember: every time the bell rings, an angel gets his wings.)
It is a timeless example of the power of a second chance.
We investors rival Hollywood in our appreciation for what’s done well.
Fortunately, missed opportunities often come back in new forms, providing another opportunity to exploit them properly.
The AI boom has brought enormous wealth to early investors. Those who bought Nvidia company (NVDA) After launching in late 2022, OpenAI’s ChatGPT would have gained more than 1,000% today.
For several years, Nvidia and the so-called Seven Wonders Technology stocks They led the entire U.S. stock market, as their soaring valuations lifted index funds, retirement portfolios, and retirement accounts across the country.
But the financial slack they once enjoyed is disappearing. It is only a matter of time before they lose ground.
So, for those who have watched others make huge gains AI shares And I thought: “I missed it”…
You didn’t miss it. The real money is not made yet.
Of course, I’m not some mysterious guardian angel. But I’d like to update the cinematic phrase: “When the market bell rings, a second chance often comes.”
per day Smart moneyI’ll share with you why the heyday of Mag 7 companies is definitely over – and why the next opportunity may be forming in a completely different part of the market.
What lies ahead is the greatest second chance I have seen in my decades-long career.
No Hollywood magic needed.
AI spending in Mag 7 reaches new highs
While Mag 7 company – Nvidia, Meta Platforms Inc. (dead), Microsoft Corporation (MSFT), Alphabet Company (Google), Apple Inc. (APPL), Amazon.com Inc. (Amzn)and Tesla company (TSLA) They brought the first wave of huge returns, but they will not bring the second. Or the biggest.
They have staked their future on a huge bet on artificial intelligence, which is evident from their latest earnings reports. But these bets are based on rosy assumptions about the future that may not come true.
All companies except Nvidia have reported earnings over the past two weeks, and all have announced increased spending on AI and infrastructure.
Meta raised its 2026 capital expenditures (CapEx) — money spent on large, long-term investments — to approximately $125 billion to $145 billion, while Alphabet raised its capital expenditures to $180 billion-$190 billion. Tesla plans to spend more than $25 billion in 2026, a huge increase from less than $9 billion in 2025.
Microsoft said it continues significant capital spending on data centers and artificial intelligence infrastructure to keep up with demand; Apple said its R&D spending has reached a record high as it continues to invest in AI and Apple Intelligence features. (The company still spends much less on AI infrastructure than Meta, Microsoft, Alphabet, or Amazon.)
Last year alone, Amazon, Microsoft, Meta, and Alphabet combined poured nearly $300 billion into capital spending. This number will double this year, reaching $635 billion.
As large-scale companies exhaust their cash reserves to build AI infrastructure, they are tapping credit markets for additional financing. The annual issuance of debt related to artificial intelligence and data centers rose from $166 billion in 2023 to $625 billion last year.
Of course, the CEOs of Amazon, Microsoft, Meta, and Alphabet are novices. They realize they may be overinvesting.
As Alphabet CEO Sundar Pichai has claimed, “the risk of underinvestment is exponentially greater than the risk of overinvestment.” Mark Zuckerberg, CEO of Meta, has made essentially the same issue.
This is the logic that economists call the “prisoner’s dilemma.” Each individual player acts rationally given his or her own circumstances, but the collective result is that everyone overinvests simultaneously, competition destroys returns, and the industry as a whole burns up the very value it set out to create.
OpenAI, the preeminent poster child of the AI boom, also provides a fascinating case study in the arithmetic of ambition. The company lost nearly $8 billion last year on revenue of only $12 billion. This year will be worse, and 2027 will be worse. OpenAI expects its losses to double to $17 billion in 2026, then double again to $35 billion in 2027.
To be clear, leading technology companies are not “zeros.” They generate strong revenues, profits, and cash flows from their existing businesses. Moreover, artificial intelligence may prove as transformative as its most ardent fans claim.
But AI has become a “cost center” rather than a powerful engine of growth. This means that even if revenues continue to grow, margins may be compressed, forecasts revised, and valuation multiples shrink.
The question is not whether AI will change the world – it certainly will – but how successful leading AI companies will be in capitalizing on that change.
Next second chance
Often times, investors assume that the creators of a new technology will automatically receive huge returns from that technology. But this rarely happens.
The Great Seven may still be great for a while yet. But the foundations beneath are much less solid than the legends suggest, and the distance from the present elevation to the ground below is very, very far.
That’s why I recommend investors stay away from the most expensive and risky AI names, and focus on the broad universe of stocks that offer a more compelling risk-reward profile.
The initial phase of the AI boom brought gains to those who pioneered the technological revolution – the same companies that are consuming money now. Be careful; Do not get too close to the flames.
The next opportunity will not come from these elderly “money makers.” The likes of Mag 7 are heading into retirement.
Instead, it will come from companies Use The technology they built.
These are companies hiding in plain sight, and are not typically thought of as AI companies. However, these companies have transformed into AI companies quickly, effectively, and without the need for honest evaluations. This provides the ability to drive normal, or even low, valuations for a company that can grow quickly in the future.
It’s like getting into Nvidia all those years ago.
I detail these “Second Chance Companies” In my last show. This is when the real money will be made.
It’s an opportunity I don’t want you to miss.
Click here to watch my free special broadcast.
It is considered,
Eric Fry
