WAYT? 2-3-2026

Episode Overview

• This episode analyzes the shift in market leadership from a concentrated "Mag 7" tech rally to a broader "S&P 493" recovery, where benefits from AI spending are finally improving margins in boring, non-tech sectors.
• The hosts discuss the emerging "Anti-Bubble" in the software sector, where traditional SaaS companies are seeing their valuations collapse due to fears that AI agents will render their business models obsolete.
• A major focus is placed on risk management strategies during technological disruption, specifically why investors should favor physical assets (Energy, Materials) over digital ones that are vulnerable to AI automation.
• The discussion provides a framework for distinguishing between "Bubble Risk" (stocks being too expensive) and "Disruption Risk" (business models dying), urging investors to avoid "value traps" in the software space.

Key Concepts

• The "Anti-Bubble" in SaaS While the broader market worries about an AI asset bubble, a reverse bubble is occurring in Software as a Service (SaaS). AI is actively eroding the pricing power of traditional B2B software companies. Investors are aggressively repricing these stocks (like Salesforce or Workday) downward because AI agents can now perform tasks or code internal solutions that previously required expensive, seat-based software licenses.

• Market Rotation to the S&P 493 The narrative that the market is solely propped up by a few tech giants is outdated. Leadership has broadened significantly. For the massive capital expenditure on AI chips (Nvidia) to be justified, productivity gains must appear in the broader economy. We are now seeing this validation as "boring" sectors like Consumer Staples and Industrials demonstrate improved margins and stock performance, proving AI is aiding the general economy, not just tech firms.

• Disruption Risk vs. Bubble Risk Investors often fear "Bubble Risk" (paying too much for a good company), but the current danger is "Disruption Risk" (owning a company whose product is becoming irrelevant). High-margin, rules-based businesses (legal, accounting, legacy IT) are vulnerable to immediate obsolescence. A low P/E ratio in these sectors is often a "value trap," signaling that the market believes future cash flows will disappear entirely.

• Physical Moats as a Hedge In a world of digital disruption, physical assets offer a safety moat. AI can generate code and content, but it cannot simulate or replace physical commodities. Sectors like Energy, Materials, and Industrials are highlighted as defensive plays because "AI doesn't replace shovels," making them immune to the specific disruption destroying software valuations.

• Selection Over Timing in Risk Management When a sector crashes (like software is currently), trying to time the bottom of a falling stock is dangerous. The superior strategy is "selection"—sticking to high-quality winners (like Microsoft) even if they dip. Psychologically and structurally, it is safer to hold a quality compounder during a drawdown than to buy a "cheap" dying business (like a mid-cap software firm) that may never recover its former relevance.

Quotes

• At 0:03:33 - "From November 2024 to 2025, the top 100 names were responsible for 88% of the market's return... Since November 3rd to today... 76% of the return has come from the bottom 400." - Evidence that market leadership has flipped from tech giants to the broader economy.

• At 0:06:49 - "The only way the AI capex boom wasn't a bubble is if the benefits accrue to the S&P 493... otherwise yeah, it was a bubble." - Explaining that for AI spending to be sustainable, it must make non-tech companies more profitable.

• At 0:11:32 - "I think the biggest risk is actually the disruption risk. What happens when industries change overnight, like what we saw to the Yellow Pages... or what happened to Uber and Lyft came to the taxi business." - Defining the specific threat AI poses to incumbent service providers.

• At 0:20:00 - "It is the financial crisis for software companies... The companies are aggressively lowering their guidance. It is bad. The P/Es are coming down, the Es are coming down, the prices are coming down." - Describing the severity of the structural collapse in the SaaS sector.

• At 0:21:55 - "The risk management way to play this 'nuclear Armageddon' in the software stocks to me is not timing, it's more like selection." - Advising against trying to catch falling knives in the crashing software sector.

• At 0:27:01 - "Is this the anti-bubble?... Not like the AI names are going to the moon... but the companies that are being displaced by AI are getting nuked." - Clarifying that the current market volatility is driven by the fear of obsolescence, not just greed.

• At 0:28:04 - "Guns to my head, we're going to break lower [on software stocks] because the AI situation then was not as advanced as it is now and the fears were not as specific." - Predicting further pain for software stocks because the AI threat is accelerating, not fading.

• At 0:32:10 - "I'll feel less dumb if I buy Microsoft and it pukes up another 12%. If I buy TEAM [Atlassian] at 100 and it goes to 80, I'll be suicidal cause I know better." - Highlighting the psychological danger of buying "broken" narratives versus holding quality assets.

• At 0:39:13 - "I don't need an analyst to tell me when a 10 PE stock is cheap. I need an analyst to tell me when a 40 PE stock is cheap." - Emphasizing that high-valuation investing requires deep conviction, while low valuations often signal obvious problems.

• At 0:48:50 - "The lesson from PayPal is: when Apple decides they're going to destroy a company, it'll probably work because they own the device." - Warning about "Platform Risk" where hardware owners can easily kill standalone software apps.

• At 0:56:14 - "Energy, Materials, and Staples. Do you know what all three... have in common? You cannot replace what they sell with Anthropic or ChatGPT." - Identifying the sectors that serve as the ultimate hedge against AI disruption.

Takeaways

• Pivot exposure to the "S&P 493": Stop waiting for a tech crash to drag down the market; diversify into "boring" sectors like Industrials and Consumer Staples which are currently benefiting from AI-driven efficiency gains.

• Audit your portfolio for "Disruption Risk": Scrutinize any service or software holdings. If a company's core product is charging high fees for data entry, basic coding, or rules-based services, they are at high risk of being replaced by AI agents.

• Avoid "Value Traps" in Software: Do not buy software stocks simply because they have hit 52-week lows or have low P/E ratios. These metrics are deceiving when a company's fundamental business model is being destroyed by new technology.

• Hedge with "Physical Moats": Allocate a portion of your portfolio to Energy, Materials, and tangible assets. These sectors act as a defensive hedge against the digital disruption affecting the technology and services sectors.

• Prioritize Selection over Timing: When managing risk in a volatile sector, focus on owning the highest quality "winner" (e.g., Microsoft) rather than trying to bottom-fish for second-tier companies that are crashing harder.

• Watch for Platform Risk: Be wary of investing in standalone apps or software features (like payments or location tracking) that can be easily integrated into the operating system by platform owners like Apple or Google.