Burry Warns of AI Market Risks as Damodaran Builds Cash Reserves

Concerns over a potential stock market downturn and the sustainability of artificial intelligence investment are dividing Wall Street, as Michael Burry warns of financial risks and valuation expert Aswath Damodaran shifts most new investment money into cash. In commentary published October 7 and October 9, 2026, the investors highlighted historical crash patterns, government intervention, corporate spending and political uncertainty surrounding the AI boom.

According to Yahoo Finance, the SPDR S&P 500 ETF traded at $778.23 in premarket trading at 5:40 a.m. ET on October 7, down 0.11% from its previous close. The fund had gained 14.12% year to date and 15.88% over the preceding 12 months, despite growing concerns about market valuations.

Burry argued in a post on X that the market had entered a denial phase resembling conditions preceding the 2000 and 2008 market crashes. He wrote, "The stock market is quite obviously in its first stage of grief, denial. Per 2000 and 2008, this stage lasts 6-9 months." His post did not specify a price target, identify when the current phase began or describe the next stage.

The former Scion Asset Management investor also expressed concern about efforts to protect the AI industry. According to TradingView, Burry believes the Trump administration has strong incentives to support the technology sector because of its economic and market significance.

"But we are talking [about] backstopping trillions with epic moral hazard implications. It will happen but there will be limits as to what they can do in the end," Burry said.

He also characterized the government's fiscal position as "terrible," arguing that policymakers have fewer options to counter a downturn than in previous cycles. He cited the 2000-2003 market decline, when stocks fell despite Federal Reserve rate cuts from 6% to 1%.

"The quiver has fewer arrows this time," Burry said.

He cautioned that financial-market mechanisms could accelerate a sell-off even if investors and financial institutions wanted to avoid one.

"There are things that can happen in the machinery on Wall Street that will bring it all down fairly fast. Everyone on Wall Street wants that not to happen, but it's moving that way anyway," Burry said.

Damodaran, known for his work on corporate valuation, is maintaining exposure to major technology companies while directing most additional funds toward cash and short-term U.S. Treasury securities. His holdings include Amazon, Alphabet, Meta and Microsoft, alongside another member of the Magnificent Seven, excluding Tesla and Nvidia.

Explaining his portfolio approach, Damodaran said, "I am personally going with the 'market consensus' choice for the bulk of my portfolio, since I do hold five of the Mag Seven (all except Tesla and Nvidia)."

According to TradingView, most of the new money he invested over the past year or two went into cash, including short-term Treasuries yielding 4%. The strategy reduced his exposure to market volatility, although it also meant missing some potential gains.

"I have left money on the table undoubtedly by doing so, but it has helped me sleep better at night," Damodaran said.

He urged investors to choose an approach to AI exposure that matches their individual tolerance for risk, describing the challenge as navigating the "AI jungle." He also warned that rising spending on computing infrastructure can inflate reported earnings without producing equivalent cash flow.

"A cap-ex driven surge in aggregate earnings comes with an asterisk," Damodaran said.

His analysis found that S&P 500 companies distributed 63% of earnings through dividends and share buybacks over the period examined, the lowest proportion since 2004. He warned that unsuccessful AI investments could force companies to write down assets and leave heavily indebted businesses under financial pressure.

"Put simply, in the event that AI does not deliver on its promise, waiting to act until accountants write off AI cap ex to sell your AI company implies that you waited too long," Damodaran said.

Political developments could add another source of uncertainty. Morningstar highlighted voter concerns about data centers, which require substantial electricity and can contribute to pressure on power grids and household utility bills. Natixis chief U.S. economist Christopher Hodge warned that new federal restrictions could affect financial markets.

"If there's federal legislation floated for some sort of curtailment about AI or data centers … that could have a pretty noticeable impact on markets," Hodge said.

State Street investment strategist Michael Arone expects AI spending to continue, while acknowledging that a Democratic sweep in the midterm elections could lead to tighter oversight. He said both major political parties recognize the strategic importance of the technology.

"Both Republicans and Democrats recognize the importance [of being a leader in AI] for both economic and national security," Arone said.

Meanwhile, Baird Strategas' Dan Clifton linked affordability concerns and higher oil prices to rising yields, inflation expectations and political pressure on President Donald Trump.

Market strategists also disagree over how long the AI rally can last. Panmure Liberum strategist Joachim Klement expects higher borrowing costs and declining free cash flow at major cloud-computing companies to threaten the boom.

"My core conviction is that the AI bubble will either burst in 2027 or in 2028, so sometime in the next two years," Klement said.

His year-end 2027 S&P 500 target of 5,000 implies a 36% decline from the level used in his analysis. The target marks a reversal from his mid-September forecast of 8,300, although he remains bullish through the end of 2026 and recommends a more defensive position if the index falls below its 200-day moving average.

Klement argued that investors are discounting broader economic and credit risks because of enthusiasm for technology earnings.

"And they excuse every macro, credit, or whatever headwind that you can come up with with that story," he said.

Goldman Sachs maintains a more positive near-term assessment. Christian Mueller-Glissmann, the firm's head of asset allocation, expects strong corporate earnings to help equities withstand higher bond yields.

"The tech sector and artificial intelligence theme are still delivering some very strong earnings momentum, and we expect that to continue," Mueller-Glissmann said.