The market is simultaneously devaluing software companies because AI is a viable competitor, while also punishing AI infrastructure companies for their massive capital expenditures with uncertain returns. This contradictory fear creates broad, indiscriminate selling.

Investment gains often come from "multiple expansion," where the market's perception of a business improves, causing it to trade at a higher valuation. This sentiment shift is frequently more impactful than pure earnings growth, and underestimating it is a primary reason for selling winning stocks too early.

Meta's stock rose 8% after announcing a massive CapEx hike, while Microsoft's fell 5% despite strong results. This contrast reveals that investors currently favor bold, narrative-driven spending to capture AI market share over more measured, margin-focused growth, even when a company has a massive sales backlog.

Companies like Tesla and Oracle achieve massive valuations not through profits, but by capturing the dominant market story, such as becoming an "AI company." Investors should analyze a company's ability to create and own the next compelling narrative.

The AI boom can sustain itself as long as its narrative remains compelling, regardless of the underlying reality. The incentive for investors is to commit fully to the story, as the potential upside of being right outweighs the cost of being wrong. Profitability is tied to the narrative's durability.

Investors often invent compelling secular narratives—like a permanent housing shortage or "Zoomers don't drink"—to justify recent price movements. In reality, these stories are frequently post-hoc rationalizations for normal cyclical fluctuations. The narrative typically follows the price, not the other way around, leading to flawed trend extrapolation.

The stock price and the narrative around a company are tightly linked, creating wild oscillations. Investors mistakenly equate a rising stock with a great company. In reality, the intrinsic value of a great business rises gradually and steadily, while the stock price swings dramatically above and below this line based on shifting market sentiment.

In a late-stage bubble, investor expectations are so high that even flawless financial results, like Nvidia's record-breaking revenue, fail to boost the stock price. This disconnect signals that market sentiment is saturated and fragile, responding more to narrative than fundamentals.

There's a contradictory market sentiment regarding AI investment. Hyperscalers like Amazon see their stock fall after announcing massive CapEx due to fears of pinched profits. Simultaneously, other software stocks are penalized for not investing enough in AI. This reflects deep investor uncertainty about the timing and ROI of AI initiatives.