Steve Eisman is best known for his bet against collateralized debt obligations ahead of the subprime mortgage crisis of 2007. Today, he sees another worrisome sign in the markets.
While nothing akin to the big short Eisman is known for (as depicted in the 2015 movie of the same name), he does hold some concerns about how diversified the current market really is. He shared a simple four-word warning for investors in a recent interview that should make many of them think twice about their current portfolio construction.
Image source: Getty Images.
How diversified is your portfolio?
Eisman said that he recently sold his stake in Alphabet (GOOG +5.13%) (GOOGL +5.49%) after holding the stock for a long time. His reasoning was that he wanted to lighten up his exposure to artificial intelligence (AI).
Alphabet has been one of the biggest beneficiaries of increased spending on AI and the technological improvements it's made to businesses like its own core advertising operations. But Eisman wanted to reduce his exposure to the technology, so it had to go. He warns that many investors may have more exposure to the AI industry than they realize. "It's all one trade," he said.
That four-word warning extends beyond the stock market, too. It's well publicized that index funds like the Vanguard S&P 500 ETF (VOO +1.21%) are increasingly concentrated in megacap AI stocks. The exchange-traded fund's top 10 holdings are all tech stocks, with a combined weight of more than 36%.
Stocks in the information technology sector account for 38% of the S&P 500 index, but you'll also find heavyweights including Alphabet, Amazon, and Meta Platforms officially classified in other sectors, so the actual weight of tech stocks is even higher.
NYSEMKT: VOO
Key Data Points
Eisman points out that the bond market is increasingly tied to AI data center construction as well. Alphabet has raised $85 billion in the debt markets over the past year. Its capital requirements could increase further with its huge commitments to AI spending over the next few years and its push into negative free cash flow territory last quarter.
Likewise, Meta produced break-even free cash flow last quarter. It has raised $55 billion in debt over the past year. Space Exploration Technologies (aka SpaceX) issued $25 billion in debt shortly after its initial public offering, and it could have nearly $700 billion in capital requirements over the next decade. There are also many smaller issuances from neocloud companies and other infrastructure businesses tied directly or indirectly to the ongoing AI building boom.
"Even people who think they're diversified because they own 60% stocks and 40% bonds are missing the fact that they're actually not diversified," Eisman says. Here's what he's doing and what you can do to ensure your portfolio can hold up if the AI trade collapses.
How can you protect yourself?
When asked what he was buying after he sold his Alphabet shares, Eisman said he's simply leaving it in cash. Index investors may have better options.
In order to diversify away from AI stocks, which are heavily concentrated among the biggest stocks in the market, investors could consider an S&P 500 equal-weight index fund like the Invesco S&P 500 Equal Weight ETF (RSP +0.57%). They could also add exposure to small-cap stocks through an index fund. Small-cap value stocks, in particular, are less speculative and historically outperform the overall market.
NYSEMKT: RSP
Key Data Points
Index investors may consider allocating some of their bond portfolio to government bonds instead of corporate bonds. They might also find value in diversifying into a fund focused on real estate investment trusts (REITs), but one focused on residential real estate investments rather than broader REITs with greater exposure to data centers.
The broader warning Eisman is sharing is timeless. Proper diversification isn't about asset classes. It requires understanding the events and risks that could impact your investments. It was true in 2006, and it's true in 2026. Those with proper portfolio allocation will likely outperform in the long run.
