The Weak Link in the AI Economy VIEW IN BROWSER  | BY KEITH KAPLAN
CEO, TRADESMITH |
On the afternoon of Aug. 10, 1996, temperatures across the Pacific Northwest were unusually high, pushing electricity demand to seasonal peaks. A high-voltage transmission line in Oregon sagged under the load – just enough to brush a nearby tree – and shut down. Power instantly rerouted through the rest of the grid, pushing already strained lines past their limits. This triggered a cascading failure operators couldn’t stop. Roughly 7 million customers across 11 Western states and parts of Canada lost power. Air conditioners shut off, traffic signals failed, and entire cities went dark – all because one overworked line touched a tree at the wrong moment. This kind of vulnerability is worth keeping in mind today, because the market can behave in a similar way. If one weak point fails, it can trigger a cascade that takes out the entire system. This year, two multitrillion-dollar AI stocks – Nvidia and Google parent Alphabet – have accounted for about one-third of the S&P 500’s gains. And just 4% of S&P 500 stocks are driving more than half the index’s performance. If these giant stocks run into trouble, it could drag the entire market down – fast. In a market this top-heavy, you have to be ready to get out of stocks fast with the highest potential gains and the lowest possible losses. It’s why my team and created our new Flash Stops. Like our regular smart stops, these are designed to alert you before stocks take a big dive, only they’re tuned to shorter timeframes. And if you tuned into my Tipping Point 2026 event on Tuesday, which I co-hosted with legendary Wall Street investor Marc Chaikin, you’ll know that these more reactive stop alerts will be crucial to have on your side next year – what Marc is warning will be the “Year of the Bear.” I’ll get into more details about Marc’s prediction… and why it’s so important… in a moment. First, let’s look at the financial plumbing of the AI economy. As you’ll see, it’s creating a pressure point that could turn a company setback into a market-wide shock. | Recommended Link | | | | 46-year Wall St. veteran Louis Navellier reveals: This isn’t a bull market – it’s the largest wealth transfer in history. His grading system (wealthy firms paid $24K/yr for him to evaluate stocks with it) shows institutions quietly moving money while retail chases AI stocks at all-time highs. Learn about the 7 stocks they’re accumulating now. Click here for the full story. |  | | Is AI’s “Loop Financing” Propping Up Growth? ChatGPT made OpenAI the hottest private company in the world. It’s also one of the most expensive to run. Independent researcher SemiAnalysis estimates that OpenAI’s annual spending on the cloud computing, chips, and data-center capacity required to run its models could reach upward of $4 billion. To keep OpenAI growing, other major AI players have stepped in with creative financing deals. Microsoft has committed more than $13 billion to OpenAI in a mix of cash and credits for its Azure cloud platform. OpenAI runs its models primarily on Azure, effectively recycling much of that funding back into Microsoft’s data-center business. Nvidia has taken a similar approach. It uses financing arrangements and subscription-style access to its GPUs to make it easier for AI startups to build on Nvidia hardware and scale as demand grows. And Amazon has invested billions in OpenAI competitor Anthropic, which runs its models mostly on Amazon’s cloud platform. It’s like giving your kids an allowance – and having them use it to pay you rent. You could call it income, but it’s the same dollars cycling through the same household. Of course, companies in industries outside of AI use vendor-financing deals. Boeing and Airbus, for example, routinely help airlines finance aircraft deliveries to manage timing and risk. The planes still have to fly profitably to justify the purchase. But when this kind of financing runs into the hundreds of billions – in an industry that dominates the stock market – it stops just smoothing transactions and starts propping up growth. And history shows that when growth depends on these kinds of financing loops, things can unravel fast. Ripped From the Dot-Com Playbook At the peak of the dot-com boom in 1999, telecom equipment makers Lucent and Nortel adopted a similar playbook. They lent billions to telecom startups network operators racing to challenge the incumbents. These startups used the money to buy networking gear from Lucent and Nortel. For a time, the loop looked self-sustaining. Easy credit fueled rapid network buildouts, equipment sales surged, and reported revenues climbed across the industry. But it all depended on boomtime optimism. When the major telecom carriers began cutting investment after realizing they had overbuilt their networks, and optimism on Wall Street began to fade, the loop snapped. Startups stopped buying Lucent and Nortel gear, loans went unpaid, and revenues that once looked solid vanished almost overnight. Lucent was forced to write off billions in bad loans and nearly collapsed. Nortel entered a fatal decline that ended in bankruptcy in 2009. Shareholders lost their shirts. We saw how fast the market dropped in April after Liberation Day. The S&P 500 dopped almost 20% in a matter of days. Outside of the 1987 crash and COVID crash in March 2020, it was one of the fastest drops in modern market history. And the next drop could be even faster. A shock to the AI story on Wall Street could race through the market in minutes, not days or months. The goal isn’t to panic or hide in cash – it’s to be prepared. I’ve been sharing three steps that you must take now to protect your downside. If you haven’t seen them yet, here they are again. You don’t want to be figuring out risk management while stocks are melting down around you. You want to think it through now, while you still have the luxury of time. Step 1: Review Every Long-Term Investment You Own If you’re holding anything long-term – index funds, dividend stocks, or even crypto – ask yourself: Why am I in this position? Write it down. What was your reason for buying? Has it changed? Is the company still growing earnings? Or is the story all hype? Now is a great time to tighten up your thinking. Step 2: Make Sure You’re Properly Diversified The S&P 500 sounds like the safest, most diversified investment you could make. But it doesn’t treat every stock equally. The bigger a company gets, the bigger a presence it becomes in the index… and in your portfolio. Before long, a handful of giant stocks can dominate your portfolio. That’s not diversification – it’s concentration risk. So make sure you’re not putting your whole portfolio into index funds thinking you’re diversified. You’re not. Step 3: Protect Yourself With an Exit Strategy At TradeSmith, we’re big believers in having a clear exit strategy. Otherwise, you risk selling your winners early or holding onto your losers too long. But for the first time since becoming TradeSmith’s CEO, I’m not recommending you lean on our classic long-term trailing stops to protect yourself. They’re a powerful tool. But they weren’t engineered for the kind of fast, hyper-reactive market we saw this year. During the tariff-induced “flash crash,” individual stocks saw even sharper drops then the indexes. Many plunged 40%, 50%, and even 70%. That’s where our new Flash Stops come in. In our backtests, they issued alerts on the following stocks: - Freshpet (FRPT) before a 74% crash
- Lifetime Brands (LCUT) before a 77% crash
- Bloomin’ Brands (BLMN) before a 72% crash
- Funko (FNKO) before an 86% crash
- Rocky Brands (RCKY) before a 75% crash
- American Eagle Outfitters (AEO) before a 69% crash
- The Buckle (BKE) before a 21% crash
- Levi Strauss & Co. (LEVI) before a 49% crash
- Shoe Carnival (SCVL) before a 42% crash
- The Gap (GAP) before a 72% crash
- QVC Group (QVCGA) before a 99% crash
Now is a great time to put this system to work. The AI bull market has been raging for years. Most investors believe it will rage on next year. But as Marc is warning, 2026 is more likely to deliver a nasty surprise. Get Ready for Tipping Point 2026 If you don’t already know Marc, he began his career as a broker on Wall Street in 1966. Since then, he’s become one of the most widely followed quants in the world. He’s created a system of market indicators that Bloomberg and Reuters carry on their terminals worldwide. He’s built three new indexes for the Nasdaq. And he’s built indicators that more than 800,000 regular investors around the world use to navigate the markets. He’s also made a series of timely market forecasts that have helped investors sidestep risk and spot turn-around opportunities… - In early 2022, Marc sounded the alarm on the post-COVID bull run, just 90 days before stocks plunged into a bear market.
- In early 2023, he said stocks were about to kick off an extraordinary recovery and shoot up 20% or more. That year alone, the S&P 500 gained 26%.
- And earlier this year, he warned of a violent market shift just before the S&P 500 plunged 19% following the Liberation Day tariffs.
Which is why I’ve been on a campaign to make sure his 2026 warning is on your radar. It’s not based on record stock market valuations… or technical indicators… or even past technology bubbles. Marc took his cue from the four-year presidential election cycle, something many of the top brokerage houses – and even Warren Buffett – consider when making investments. In a nutshell, markets tend to boom in the run-up to elections, when administrations lean hard on stimulus, growth, and giveaways. But once the votes are counted, that largesse fades, and reality sets in. The post-election year (for the current cycle, that’s 2025) is where we first start to see the cracks forming. The worst year tends to be the midterm election year. In this case, 2026. Across the last 14 election cycles, bear markets began or were in progress during nine of those midterm years. In other words, we saw a bear market about 65% of the time. That’s why I hope you take some time now to follow the steps I outlined above. It will help you prepare for what could be a very different kind of market than the one we’ve experienced over the past couple of years. If you missed our Tipping Point 2026 event on Tuesday, you can catch up here. Sincerely, 
Keith Kaplan
CEO, TradeSmith P.S. If you’re joining us here at TradeSmith for the first time, thank you for the trust you’ve put in us. You’ve joined a growing group of investors who are turning the tables on Wall Street using out world-class tools and analytics. This year, we launched a tool that spots hidden seasonality patterns in markets… a screener that find undervalued options trades… and a fully automated, AI-powered model portfolio. And I can wait for you to see what we have in the pipeline for next year. Markets will do what they do. Our job is to make sure you’re prepared for whatever comes next. And we’re just getting started! | 
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