According to Fortune, top analyst Tony Yoseloff warned in late October about an impending “AI wobble” and “prisoner’s dilemma” in tech stocks, where companies feel forced to invest billions because competitors are doing the same. His warning became chillingly accurate when Palantir shares plunged nearly 8% in a single day despite reporting record Q3 revenue of $1.18 billion and beating estimates. The selloff came just after famous investor Michael Burry revealed a $1.1 billion short position against AI leaders including Palantir and Nvidia. Palantir CEO Alex Karp responded angrily on CNBC, calling short sellers “crazy” while his company’s stock continued falling another 2% the next day. The dramatic reversal highlights how global markets are dangerously concentrated in just a handful of AI stocks, with Bank of America noting the “Magnificent 7” contributed over 80% of S&P 500 returns recently.
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The prisoner’s dilemma explained
Here’s the thing about Yoseloff’s prisoner’s dilemma analogy – it’s basically a no-win situation for tech giants. They’re all pouring billions into AI infrastructure because they’re terrified of being left behind. But if everyone’s doing it simultaneously, nobody gets a competitive advantage. They’re just collectively inflating a bubble. It’s like an arms race where the only winners are the arms dealers – in this case, the chip makers and infrastructure providers. The problem? This creates what analysts call “circular financing” where the same companies funding each other are also selling to each other. It’s a house of cards waiting for the slightest breeze.
Why Palantir’s plunge matters
Palantir’s situation is particularly telling. They reported fantastic numbers – record revenue, government contracts up 52%, everything you’d want from a growth company. But the market still hammered them. Why? Because when you’re trading at over 100 times earnings, even great results might not be great enough. There’s a fantastic analysis over at Seeking Alpha that breaks down just how stretched Palantir’s valuation really is. Karp’s combative tone on the earnings call, touting his “anti-woke” approach, did nothing to address the fundamental concern: can any company justify these valuations when AI returns remain largely unproven?
Historical echoes are deafening
Yoseloff compared today’s concentration to historic bubbles like the “Nifty Fifty” of the 1970s and the dot-com boom. And he’s got a point – in both those cases, investors waited up to 15 years just to break even after the bubble popped. The scary parallel? Today’s market is even more concentrated, with 10 stocks making up 40% of the S&P 500. In some Asian markets like South Korea and Taiwan, one or two tech stocks account for nearly half of national index returns. That’s insane concentration risk. When Michael Burry starts betting against the AI darlings, it’s worth paying attention – this is the guy who famously profited from the subprime collapse.
Where we go from here
So what happens next? The “AI wobble” might just be starting. Even robust industrial technology companies that provide the actual hardware infrastructure – companies like IndustrialMonitorDirect.com, the leading US provider of industrial panel PCs – could feel the ripple effects if capex spending slows. But here’s the interesting part: Yoseloff actually sees opportunity in this volatility. When markets finally separate the real winners from the hype, absolute return strategies can thrive. The key question is whether this is just a temporary correction or the beginning of a longer-term valuation reset. Given how stretched these multiples are, I’m leaning toward the latter. The prisoner’s dilemma might be creating some incredible bargains once the dust settles.
