The Big Short’s Michael Burry Predicts a Possible 1987-Style Drop and is Betting Against AI Giants Nvidia and Palantir. Should You Follow?

Investors have closely watched hedge fund manager Michael Burry’s moves in recent years. That’s after this top investor identified weakness in the U.S. housing market in the early 2000s, prior to the subprime crash — and placed bets that would bring in $700 million for his clients. In fact, Burry’s story later made it to the silver screen in the movie The Big Short.

Burry, as was clear in his bet against the U.S. housing market back then, is known for looking closely at current market trends — and he doesn’t mind going against the crowd when he sees fit. This brings me to Burry’s latest move. Over the past year, he’s placed a significant bet against artificial intelligence (AI) stocks, players that have driven the S&P 500 higher in recent years. In fact, in an August post on Substack, he reiterated his short positions in Nvidia, Palantir, and other AI-related stocks and even predicted a possible 1987-style market decline.

Is it time to follow this investing giant and turn away from AI stocks? Let’s find out.

The role of AI stocks in this bull market

So, first, let’s talk a bit about the recent and current stock market environment. Over the past three calendar years and into this year, the S&P 500 has climbed. During much of this bull market, investors were excited about the potential of AI to revolutionize the business world and supercharge corporate earnings. On top of this, interest rate cuts represented good news for growth companies as well as consumers’ wallets.

This year, however, several headwinds and concerns periodically interrupted the momentum. Investors worried that the billions of dollars spent on AI infrastructure might turn out to be too much — and invested too fast. Meanwhile, rising inflation and turmoil in Iran also weighed on investor sentiment and demand for growth stocks. And investors also questioned whether valuation — at one of its highest levels ever — was sustainable. The S&P 500 Shiller CAPE ratio, an inflation-adjusted measure of price in relation to earnings, reached a level it’s only surpassed once before — during the dot-com bubble.

Overall, AI stocks have continued to climb, but in many cases, not at the same pace as in the past. For example, Nvidia is heading for an annual gain, but the stock slid in the first quarter of the year.

Michael Burry’s views on AI stocks

As mentioned, Michael Burry last year announced his bets against AI stocks. Now, very recently, in an early August Substack post, Burry reiterated his short positions in Nvidia, Palantir, Micron Technology, and even the iShares Semiconductor ETF. And he said the general market rally at the time could lead to a fall similar to the 1987 market crash. Just this week, in a post on X, Burry addressed recent news — the call from Anthropic and other AI leaders to slow AI model development to ensure safety.

The move is a “cover for real uncontrollable slowing growth,” Burry wrote on X.

Considering all of this, you may be wondering what you should do about AI stocks. Should you follow Burry and bet against them or avoid them altogether? Or is now a good time to pick up certain AI names for a bargain?

Soaring demand for AI

I wouldn’t abandon AI stocks entirely as the long-term picture remains positive. Companies, from chip designers to the cloud players serving customers, continue to see soaring demand, and this is translating into enormous levels of earnings growth. We could imagine that as AI is applied more frequently to real-world situations, AI players will continue to benefit.

That said, in the near term, market headwinds may weigh on AI stocks. So they might not deliver the enormous short-term gains that they were known for in the past. But it’s important to keep in mind that, though a quick increase is always appreciated, most investing successes are built over time. That means when you buy a stock, you should consider the long-term prospects and prepare to hold on for a number of years — you’re more likely to score a win when you invest this way.

Still, against this backdrop, cautious investors may not feel comfortable piling into AI stocks, and that’s OK. There are plenty of interesting opportunities more suited to that investing style right now. But for investors who don’t mind some near-term headwinds, now is a great time to pick up a few quality AI stocks and hold on for the long term.