Hello, Reader.
Hollywood loves a “second chance” story.
It’s no surprise that It’s a Wonderful Life ranks No. 1 on the American Film Institute’s 100 YEARS…100 CHEERS list of the most inspiring films of all time.
Reluctant hero George Bailey recognizes the immense value of his existence with the help of his guardian angel. (Remember: Every time a bell rings, an angel gets its wings.)
It’s a timeless example of the power of a second chance.
We investors rival Hollywood with our appreciation for a good do-over.
Luckily, missed opportunities often come back again in new forms, offering another chance to get it right.
The AI Boom brought immense wealth to early investors. Those who bought Nvidia Corp. (NVDA) after the launch of OpenAI’s ChatGPT in late 2022 would have achieved over 1,000% gains today.
For several years, Nvidia and the so-called Magnificent Seven technology stocks have driven the entire U.S. stock market, their soaring valuations lifting index funds, pension portfolios, and retirement accounts across the country.
But the financial slack they once enjoyed is disappearing. It’s only a matter of time before they lose ground.
So, to those who watched others make huge gains in AI stocks and thought, “I missed it”…
You didn’t miss it. The real money hasn’t yet been made.
Of course, I’m no mystical guardian angel. But I’d like to update the cinematic turn-of-phrase: “When the market bell rings, a second chance it often brings.”
In today’s Smart Money, I’ll share why the heyday of the Mag 7 companies is decidedly over – and why the next opportunity may be forming in a very different part of the market.
What lies ahead is the single greatest second chance I’ve seen in my decades-long career.
No Hollywood magic necessary.
Mag 7 AI Spending Hits New Highs
While the Mag 7 companies – Nvidia, Meta Platforms Inc. (META), Microsoft Inc. (MSFT), Alphabet Inc. (GOOGL), Apple Inc. (APPL), Amazon.com Inc. (AMZN), and Tesla Inc. (TSLA) – brought the first wave of massive returns, they won’t bring the second. Or the biggest.
They have staked their futures on a massive AI bet, evident from their latest earnings reports. But those bets rely on rosy assumptions about the future that may not come to pass.
All but Nvidia reported earnings over the last two weeks, and all declared an increase in AI spending and infrastructure.
Meta raised its 2026 capital expenditure (CapEx) – the funds spent on big, long-term investments – forecast to roughly $125 billion–$145 billion, while Alphabet increased CapEx to $180 billion–$190 billion. Tesla plans to spend more than $25 billion in 2026, a massive increase from under $9 billion in 2025.
Microsoft said it is continuing heavy capital spending on data centers and AI infrastructure to keep up with demand; and Apple reported that its research and development spending reached a record high as it continues investing in AI features and Apple Intelligence. (The company is still spending far less on AI infrastructure than Meta, Microsoft, Alphabet, or Amazon.)
Last year alone, Amazon, Microsoft, Meta, and Alphabet collectively poured nearly $300 billion into capital expenditure. That figure will more than double this year to an eye-watering $635 billion.
As the hyperscalers deplete their cash reserves to build AI infrastructure, they are tapping the credit markets for additional financing. Annual issuance of debt tied to AI and data centers surged from $166 billion in 2023 to $625 billion last year.
Of course, the chief executives of Amazon, Microsoft, Meta, and Alphabet are not novices. They understand that they may be over-investing.
As Alphabet’s CEO Sundar Pichai has argued, “The risk of under-investing is dramatically greater than the risk of over-investing.” Meta’s CEO, Mark Zuckerberg, has made essentially the same case.
This is the logic of what economists call a “prisoner’s dilemma.” Each individual player acts rationally given their own circumstances, but the collective result is that everyone over-invests simultaneously, competition destroys returns, and the industry as a whole burns the very value it set out to create.
OpenAI, the prominent poster child of the AI boom, also offers a fascinating case study in the arithmetic of ambition. The company lost approximately $8 billion last year on revenues of just $12 billion. This year will be worse, and 2027 worse still. OpenAI expects its losses to double to $17 billion in 2026 and double again to $35 billion in 2027.
To be clear, the leading technology companies are not “zeros.” They generate robust revenues, profits, and cash flows from their existing businesses. Furthermore, AI may well prove as transformative as its most enthusiastic cheerleaders claim.
But AI is becoming a “cost center” rather than a powerful growth driver. That means that even if revenues keep growing, margins may compress, expectations reset, and valuation multiples shrink.
The question is not whether AI will change the world – it certainly will – but how successfully the leading AI companies will capitalize on that change.
The Second Chance Ahead
Too often, investors assume that the builders of a new technology will automatically capture huge returns from that technology. But that’s rarely the case.
The Magnificent Seven may remain magnificent for some time yet. But the foundations beneath them are far less solid than the mythology suggests – and the distance from the current altitude to the ground below is very, very far.
That’s why I’ve been recommending that investors steer clear of the priciest, diciest AI names and pivot toward the vast universe of stocks that offer a more compelling risk-reward profile.
This is where the second chance lies.
The initial phase of the AI Boom brought gains to those that pioneered the technological revolution – the very companies now burning through cash. Be careful; don’t get too close to the flames.
The next chance won’t come from these aged “money-makers.” The likes of the Mag 7 are headed for retirement.
Instead, it will come from the companies using the technology that they have built.
These are firms hiding in plain sight, not typically thought of as AI companies. And yet, they are becoming AI companies quickly, effectively, and without nosebleed valuations. This provides the ability to pay ordinary, or even low, valuations for a company that can grow rapidly in the future.
It’s like getting in on Nvidia all of those years ago.
I detail these “second chance companies” in my latest presentation. This is when the real money will be made.
And it’s an opportunity I don’t want you to miss out on.
Click here to watch my free, special broadcast.
Regards,
Eric Fry
