'The Big Short' Investor Steve Eisman Warns Markets Will Go 'Straight Down' If Any Hyperscaler Cuts Capex

• Eisman said that the current trade in the markets is all about AI, even as the July meeting of the Federal Open Market Committee looms later this week.
• He added that even if investors bought stocks like Goldman Sachs, it wouldn’t mean they were diversifying their portfolios beyond the ongoing AI trade, given that investment banks are undertaking AI financing.
• Eisman said that the AI industry has become a lot more capital intensive now, and the increasing presence of cheaper AI models from China has added to the complexity, with the possibility of a price war looming

“The Big Short” investor Steve Eisman on Monday warned that the markets will go “straight down” if any hyperscaler cuts its capital expenditure.

During an interview with CNBC, Eisman said that it is questionable if any of the frontier model developers have any moats around their businesses.

“I think the market will go straight down. At the end of the day, it all boils down to, in a sense, Nvidia,” he said, talking about how the markets would respond to potential news about a hyperscaler trimming its capex.

It’s All About AI Trade Now, Says Eisman

Eisman said that the current trade in the markets is all about AI, even as the July meeting of the Federal Open Market Committee (FOMC) looms later this week.

“It’s all one trade. It’s AI. Either you succeed or you won’t. Just take, for example, the investment banks… the numbers were really great. But why were they great? They were great because they’re doing a lot of AI financing,” he said.

Eisman added that even if investors bought stocks like Goldman Sachs, it wouldn’t mean they were diversifying their portfolios beyond the ongoing AI trade, given that investment banks are undertaking AI financing.

Eisman Says AI Trade Is Much More Complex Now

Eisman also highlighted the change in investor mindset over the past year when it comes to companies' AI capex. He added that the overall sentiment a year ago was great, with companies spending money more freely on AI than they are now.

“Every time one of the companies would increase their capital expenditures, the stock would go up. It’s much more complicated now,” he said.

Eisman added that the AI industry has become a lot more capital intensive now, and the increasing presence of cheaper AI models from China has added to the complexity, with the possibility of a price war looming.

He also highlighted the fall in Alphabet Inc.’s (GOOG, GOOGL) shares last week despite the company’s better-than-expected second-quarter (Q2) results. The trigger, according to Eisman, was Alphabet’s increased capex forecast.

“They beat expectations. Huge numbers were coming through. But they increased the capex from $190 billion to $205 billion. People are freaking out,” he said, highlighting the catch-22 situation that the AI trade is in right now.

Market Will Have A ‘Big Correction’ If AI Doesn’t Succeed, Warns Eisman

The investor also warned that the equity markets will see a “big correction” if the AI technology does not succeed. He highlighted the concentration of the tech and AI trade across equities as well as bonds.

“Of the 40% in bonds, most of the new issuance of bonds is AI related. So even people who think they’re diversified because they’re investing in bonds are not really that diversified. What scares me is that it’s all one trade,” he added.

Eisman said that he’s sitting on cash after offloading his stake in Alphabet, while adding that he is trying to figure out what to do next.

The S&P 500 ETF (SPY) is up 16% over the past 12 months, while the Invesco QQQ Trust (QQQ) is up 21%.

The Global X Artificial Intelligence & Technology ETF (AIQ) is up 30% during this period, while the iShares U.S. Technology ETF (IYW) is up 32%.

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