This chief investor is urging people to quit chasing this 1 stock sector, saying it’s not if but when ‘this thing breaks’ — is your portfolio ready?

“We’re in the crazy stage,” Smead told Business Insider, comparing today’s market to the eve of the dot-com crash in late 1999. (1)

He points to valuations he feels are untethered from reality.

Since early 2023, Nvidia’s value has jumped twelvefold to $4.4 trillion, while Palantir has skyrocketed twenty-eight-fold to $420 billion.

Meanwhile, AI firm CoreWeave’s valuation just hit $60-billion on just $1.2 billion in quarterly revenue.

“We’re bumping up against history real hard now,” he warns, especially worried about many Americans have household wealth tied to Big Tech.

Here’s what you should know to avoid taking a hit.

“Massively overcapitalized” stocks

Smead said AI firms’ potential success is overcapitalized and predicted that “when this thing breaks,” stocks could trade at a fraction of current prices.

That would have a domino effect in U.S. equity markets that are already heavily weighted in the technology sector. Reuters notes that the sector’s value makes up 34% of the S&P 500, higher than the peak concentration in March 2000. (2)

Smead says AI stocks could see a 40% drop in value daily as occurred in the dot-com bust.

“That is going to be spooky,” he said.

He and other market observers are concerned about another development that harkens back to the dot-com bubble: increasing ties between major players. Case in point? Nvidia’s plan to invest up to $100 billion in OpenAI.

When companies invest in one another and share customers, it creates ‘circular’ financing — a self-reinforcing feedback loop.

Paulo Carvao, a senior fellow who researches AI policy at the Harvard Kennedy School told Bloomberg that the same thing happened in the late 1990s. At that time, he said, startups made circular deals around advertising and cross-selling. (3)

“Companies bought each other’s services to inflate perceived growth,” Carveo noted. “Today’s AI firms have tangible products and customers, but their spending is still outpacing monetization.”

For his part, Smead says his fund has mostly steered clear of tech and invests in energy, construction, health care, retail and Real Estate Investment Trusts (REITs). (4)

He frames them as “out-of-favor” sectors with merit, solid sectors rather than high-flying bets.

These industries tend to have more stable cash flows or tangible assets and are less prone to hype-driven valuation multiples.

But they have their risks, too. There are regulatory shifts, interest rates and the cyclical nature of energy or housing.

So what’s an investor to do?

A balanced approach

No sector is bulletproof, so your goal should be to cut down the chance that a single downturn wipes out large parts of your portfolio.

Going all-in on one sector is risky because you’re putting a lot of cash in one area, so you’re more vulnerable to a valuation collapse.

Or worse, if assets fall, you might get trapped into selling at a bad time. You’re also missing out on gains elsewhere when your money is locked into one sector, so there’s the opportunity cost.