An AI stock market bubble, like the dot-com bubble of the late 90s, is primarily equity-financed, not debt-financed. Historically, the bursting of equity bubbles leads to milder recessions because they don't trigger systemic failures in the banking system, unlike collapses fueled by debt.

The historic rotation out of momentum and into value may signal a major regime change. If cheap AI models boost margins for traditional "value" businesses, it could reverse a two-decade trend of growth stock outperformance for the first time since the dot-com bust.

For the first time, the high-multiple software industry faces a potential existential threat from AI. Even the possibility of disruption is enough to compress valuations, causing massive dispersion where indices look calm but underlying sectors are experiencing extreme rotation.

Overvaluing assets in a new tech wave is common and leads to corrections, as seen with mobile and cloud. This differs from a systemic collapse, which requires fundamental weaknesses like the massive debt and fraud that fueled the dot-com crash. Today's AI buildout is funded by cash-rich companies.

Current market shifts should not be mistaken for the end of the AI investment cycle. Instead, investors are rotating within the AI theme and diversifying into other sectors. It's a reset and a search for value beyond the most crowded names, not an exit.

While a major sell-off in AI stocks would likely cause an initial "knee-jerk" strengthening of the US dollar due to risk aversion, the subsequent focus would shift to the US's twin deficits, leading to a multi-year dollar weakening trend once volatility subsides.

Geopolitical events are forcing stocks, bonds, and oil to move in lockstep, the tightest in 20 years. Simultaneously, the rise of AI is creating a 'winner-take-all' perception, causing individual stocks to diverge more than ever, creating a paradox for investors to navigate.

Unlike the 2008 financial crisis, which was a debt-fueled credit unwind, the current AI boom is largely funded by equity and corporate cash. Therefore, a potential correction will likely be an equity unwind, where the stock prices of major tech companies fall, impacting portfolios directly rather than triggering a systemic credit collapse.

Fears that AI will render software and other tech industries obsolete are driving a significant capital shift. Investors are selling tech stocks and buying into sectors perceived as immune to AI disruption, such as energy, construction, and consumer staples. This rotation explains the recent underperformance of tech-heavy indices.