Jefferies' Wood and Michael Burry warn AI spending by Microsoft, Meta could trigger bubble burst

Jefferies' Christopher Wood warns Microsoft, Meta, and Alphabet AI spending may backfire

Jefferies strategist Chris Wood has warned that Wall Street's hyperscalers risk massive capital destruction from excessive AI spending, arguing markets may soon push back against rising debt-funded investments. He also flagged geopolitical risks and drew attention to growing concerns that AI valuations could become detached from economic fundamentals. Amid the seesaw market frenzy over artificial intelligence, Jefferies' Global Head of Equity Strategy, Chris Wood, cautioned that the stock market may soon begin to push back against the significant spending by Wall Street's hyperscalers, which he predicts will be "massive capital destruction". In his latest 'Greed & Fear' report, Wood highlighted that the four major US hyperscalers, including Microsoft, Facebook-parent Meta, Amazon and Google-parent Alphabet, have issued bonds worth $144 billion so far this year, compared with $83 billion in the entire 2025. The shares of these four hyperscalers, meanwhile, have rallied up to 180% since the beginning of 2023, outperforming the S&P 500 index by 44%. 'Malinvestment' by hyperscalers Wood noted that the shares of these hyperscalers have, however, declined nearly 9% since late May and have underperformed the S&P 500 index by more than 10% from the relative high in early May. He highlighted that the cycle of AI frenzy is most likely to end not because the hyperscalers suddenly rein in their spending but because markets start to push back against that spending. "And that spending is not just cash but also, increasingly, borrowed money," he added. "Meanwhile, Greed & Fear's longstanding prediction is massive capital destruction, or what Austrian economists like to call "malinvestment", for the hyperscalers, or at least for most of them," Wood said in the note. Notably, more than $2 trillion was wiped off the total market value of the 'Magnificent 7' stocks last month as investors weighed the increasing spending of these tech giants on AI infrastructure, raising worries over a possible AI bubble. Also read: No longer magnificent? How Apple, Microsoft and other Mag 7 stocks are crumbling under AI pressure Scary implications of Ukraine war developments The Jefferies analyst noted that the past quarter ended with investors questioning the durability of the Iran-US interim peace agreement, with remarkably little attention being paid to what is happening in the Ukraine conflict. "It is increasingly clear that it is not just Ukraine which is at war with Russia but also NATO. The implications of this are rather scary to Greed & Fear. But markets do not care for now. All Greed & Fear can say is that it still makes sense to own some energy stocks as a hedge, and that at some point, geopolitics will matter for investors," he further said. Earlier in June, Wood warned that the AI trade will eventually be broken not by a sudden collapse in demand for chips but by market-wide realisation that hyperscalers and leading AI labs cannot earn an adequate return on the vast capex they are undertaking. He sees concerns over "malinvestment" as the specific risk that will finally trigger the end, or at least a painful pause, in the AI boom. Also read: Chris Wood's big warning! The specific risk that will finally trigger the end of AI trade Wood has joined a long list of analysts sounding the alarm over possible overspending by the hyperscalers. Michael Burry, popular for correctly predicting the market crash of 2008, has been warning against the rising debt levels as a result of the massive spending. Earlier this year, Burry wrote in a Substack post that he sees many indicators, both technical and fundamental, lining up for the same conclusion as the dot-com crash. "1999 went where no market had gone before, and I would say so can this one...It is already there on several indicators," he said, arguing that massive venture capital flows, rising AI debt issuance, and extreme market optimism are creating conditions where valuations may detach from economic reality. Burry recently announced that he has placed bets against Tesla, Caterpillar, Nvidia, Applied Materials and more, in what marks his latest series of bearish bets. He also bet against Palantir and other companies. Also read: AI bubble or boom? Why Warren Buffett called Big Short fame Michael Burry 'Cassandra' (Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

Michael Burry warns AI stocks may be nearing a painful turn

It seems the 'Big Short' Michael Burry isn't easing up on his criticism of the AI trade anytime soon. The hedge fund investor who became famous for betting against the 2008 housing bubble has spent the past few weeks sharpening his attack on AI stocks, and his latest posts pushed that warning into even darker territory. In his string of scathing social-media posts, he paired sharp language with charts showing a widening gap between chip stocks and the companies shelling out billions to build AI infrastructure. Over the past few months, Burry has taken AI stocks to the cleaners, building his case around stretched valuations, crowded trades, and a growing divide between AI chip winners and the hyperscalers paying for the buildout. The big concern is whether investors may have priced the winners as if the spending boom can keep compounding without disappointment. Why Burry says the AI trade is nearing trouble Burry's latest AI troll was apocalyptic, warning of what could be the beginning of a grueling stock market crash. : According to Seeking Alpha, Burry posted, "The end is nigh," then added, "Dancing with the devil in the pale moon light," a reference to Jack Nicholson's Joker line from Tim Burton's Batman. Burry wrote that "the AI narrative is nothing more than mass addiction," and warned that "the AI narrative may die a death by a thousand cuts, and I have only seen a few dozen so far." His charts pointed to two concerns. AI semiconductor stocks have sharply outperformed the hyperscale cloud companies funding the infrastructure buildout, as well as broader AI beneficiaries. Another chart showed the Philadelphia Semiconductor Index trading near the top of its 15-year valuation range on forward P/E. Burry argues that chip stocks may have raced ahead of the fundamentals supporting the AI boom. For perspective, according to Reuters, the chip sell-off hit the tape hard. The Philadelphia semiconductor index dropped 6.3% on July 1 and another 5.5% on July 2, while the S&P 500 tanked 0.22% and the Nasdaq dropped 0.66% and 0.80%, respectively. Why Michael Burry is turning harder against AI stocks Over the past few months, Burry's AI warning has shifted from a single-name short to a broader attack on the trade's poster children. It all goes back to early November last year, when his then-hedge fund, Scion Asset Management, disclosed put options on 1 million Nvidia shares and 5 million Palantir shares, according to Business Insider, betting against two of the biggest names in the AI space with positions valued at $187 million and $912 million, respectively. Since then, Burry has widened his bet. According to Business Insider, he recently disclosed bearish positions via put options on some of the biggest names in tech, including Tesla, Nvidia, Caterpillar, Applied Materials, and the iShares Semiconductor ETF. Memory giant Micron recently became the latest target of this scathing narrative. As covered by TheStreet's top tech reporter, Aditya Raghunath, Burry disclosed on July 1 that he had shorted Micron (MU) shares at $1,051.87, according to a Substack post. The bet followed a huge rally, with the stock up nearly 700% over the past year and 241% in 2026. He framed the move as a bet against a herd-mentality rally, blaming "fear of missing out, the greater fool theory, and public commitment bias". Burry's broader argument is that the AI trade is effectively feeding on itself. Chip stocks jump primarily because big tech giants spend heavily on AI. Equipment makers rise because chip companies are building more capacity. Investors then treat every new spending plan as proof that demand will keep growing. After Samsung and SK Hynix announced a huge chip hub in Korea, The Wall Street Journal quoted Burry saying, "I see that as the beginning of the end." He argues that investors might be paying too much, too soon, before it is clear whether all this spending will deliver strong returns. Burry sees AI spending, chip demand, and momentum-driven valuations as one crowded trade that could fall hard if expectations disappoint. The insane numbers behind the AI trade * According to Reuters, Nvidia hit $5 trillion in market value on Oct. 29, 2025, after its shares climbed 12-fold since ChatGPT's 2022 launch. Essentially, one AI chipmaker became big enough to pull the whole market's mood with it. * According to Reuters, Microsoft, Alphabet, Amazon, and Meta together carried more than $10 trillion in market value and made up 17% of the S&P 500 in April. * According to Axios, Alphabet, Amazon, Meta, Microsoft, and Oracle raised $255.34 billion through debt and equity in 2026, while planning roughly $750 billion in AI data center spending by year-end. * According to the Financial Times, the Magnificent Seven lost over $2.2 trillion in market value in June 2026. * According to Business Insider, hyperscaler AI spending could reach $725 billion this year, while the Philadelphia Semiconductor Index is up 88%. * According to Yahoo Finance, BofA's Bubble Risk Indicator put the semiconductor sector at 0.91, flashing near-bubble risk. That does not mean a crash is guaranteed, but it shows how stretched the AI trade has become. Sources: Reuters, Financial Times, Axios, Yahoo Finance, and Business Insider. The Arena Media Brands, LLC THESTREET is a registered trademark of TheStreet, Inc. This story was originally published July 6, 2026 at 7:07 AM.