28 Oct Q3 2025

Posted at 11:11h in Uncategorized by

Artificial Intelligence and data centers have taken over financial markets, which is causing investors to question whether we are in an AI bubble similar to the dot-com bubble of the 1990s.  Since ChatGPT was launched in November 2022, AI-related stocks, as defined by a basket created by JPMorgan, have accounted for 75% of S&P 500 returns, 80% of earnings growth, and 90% of capital spending growth.  The size of the capital involved is truly astounding.  Meta (Facebook), Amazon, Alphabet (Google), and Microsoft are spending a projected $335 billion on capital expenditures this year.  OpenAI, the developer of ChatGPT, has deals to build data centers that will cost about $750 billion and a $300 billion cloud computing agreement with Oracle.  ChatGPT may be groundbreaking, but $1 trillion is an insane amount of money, more than the combined 2024 revenues of Amazon, Apple, Alphabet, Microsoft, Meta, and Nvidia.   Bain released a technology report earlier this year that stated, “Demand for compute and AI services are rising rapidly, but the ability to monetize services and generate revenue from AI is lagging behind this pace.  AI companies will need $2 trillion in combined annual revenue by 2030 to fund computing power to meet demand, but it is likely revenue will fall $800 billion short.”

My commentary is not intended to be negative on AI.  Artificial intelligence (as currently defined) is likely to be a significant boost to companies primarily through enhanced productivity and improved decision making.  The question for investors is whether current investments will yield a return.  Circling back to my dot-com reference in the first sentence of the newsletter, Cisco Systems produces networking equipment such as switches and routers.  Think of these devices as the plumbing of the internet.  Cisco’s stock price was around $10 in late 1998 before skyrocketing to $80 in early 2000, and then collapsing back to $10 from 2000-2002.  The stock has compounded roughly 10% per year since 2003, but is yet to get back to its dot-com peak in 2000.  Are we currently in 1998 when Cisco was $10, 1999 when the stock price was exploding, 2000 when the stock was at $80, or are none of these past comparisons relevant?  History never seems to repeat itself exactly, but as Mark Twain said, it often rhymes.   

Goldman Sachs recently released a strategy paper that stated, “History suggests that bubbles are often driven by exuberance that builds around a transformative technology, attracting investors, capital, and new entrants.”  Later on the report goes on to say, “Typically bubbles exhibit rapidly rising asset prices, extreme valuations, and significant systemic risks driven by increased leverage.”  We have rapidly rising asset prices in some pockets of AI stocks.  To date most investments have been made with cash flow rather than leverage, but the anticipated spending I referenced earlier will necessitate increased leverage.  Regarding valuation, the cyclically adjusted price-to-earnings ratio measures valuation against inflation-adjusted earnings over the last 10 years.  This data attempts to smooth out business cycles.  As you can see below, stocks are expensive, but they remain below valuations of the dot-com bubble.

In my opinion we are neither in the first inning of an AI infrastructure build out or at the peak of a bubble.  We are at a time when risk management is of critical importance. 

One area that causes some concern, in my opinion, is the rise of “circular” deals.  A recent Morgan Stanley report pointed out, “The key players in the AI space are becoming increasingly interwoven, with suppliers funding customers, rising customer concentration, revenue sharing between customer and vendor, take-or-pay contracts, and vendor repurchase agreements.  New innovative financing structures are also emerging.”  For example:

  • Nvidia is investing $100 billion in Open AI.  Open AI will then use this money to purchase Nvidia chips
  • Open AI announced a deal to buy $78 billion in chips from AMD, and is awarded 10% of the company
  • Nvidia owns over 5% of Coreweave.  Coreweave’s business is to essentially rent Nvidia GPUs to others.  Nvidia has agreed to purchase any unsold cloud computing capacity from Coreweave through 2032. 
  • OpenAI is particularly important to Oracle and Coreweave, representing 2/3 of Oracle’s remaining performance obligations and 40% of Coreweave’s.

So how do we manage portfolios during a time when strong growth is isolated to a specific theme with bubble-like characteristics?  The first key step is to stay disciplined within the objectives of each portfolio.  Many clients have a portion, and in some cases a significant portion, of their overall portfolio invested for income generation and/or capital preservation.  Investments in AI-related stocks are put in place for growth, not income or capital preservation.  We stay true to our discipline in each portfolio and do not reach for growth in portfolios that focus on income and capital preservation.  Managing a growth portfolio, such as our Core Equity portfolio, in times of frothy markets is a delicate balance of slowly increasing defensiveness while recognizing that markets can continue their upward trend much longer than may seem rational.  We believe the key to successfully managing a growth portfolio in this environment is to understand and manage risk exposure to the growth stimulus, in this case AI data center infrastructure.  It is important to have exposure to this investment theme without allowing the portfolio to become too heavily weighted in this area.

One way to explain this balance in more detail is to discuss our thinking behind selling Ciena out of the Core Equity portfolio last week.  Ciena is a global leader in networking hardware and software, most notably in optical systems.  We first purchased Ciena in 2019, increased our position size in 2022, and trimmed our position size in 2024 and 2025 before fully selling the position last week.  Ciena was a solid, but volatile, performer from the time of our original purchase through the end of last year.  The stock traded down with the rest of the market at the beginning of this year before bottoming in early April.  From the bottom in early April through our sale last week, the stock was up an astounding 225% in just over six months.  The rapid stock price increase was driven by future expectations of data center infrastructure buildout, as Ciena is the market leader in the hardware and software necessary to move data between data centers.  Our decision to sell was driven by weighing risk versus reward at the current stock price and managing risk of the entire portfolio given other investments with AI exposure.  We felt the extreme increase in stock price embedded significant growth expectations.  Ciena may certainly meet and possibly exceed these expectations, but any bump in the road could cause a material pullback in the stock.  We are also continually cognizant of our overall AI exposure, and we have many other investments in the portfolio that benefit from the AI infrastructure buildout.  We felt these other investments offered a better risk/reward at current stock prices, and that Ciena was most at risk of our portfolio holdings for a potential pullback.

On a related note, the winners of today are usually not tomorrow’s winners.  The chart below shows the largest ten stocks in the S&P 500 every 10 years beginning in 1985. 

Source: Apollo

There is a lot going on in the chart, but there are two main takeaways.  First, as I have mentioned in many previous newsletters, the market is more concentrated that it has ever been.  Furthermore, this concentration of large companies is primarily composed of technology companies with a heavy correlation to AI.  Second, the largest companies tend to be replaced rather than stay in the top ten.  Six of the current ten largest were not in the ten largest in 2015.  Only Microsoft has successfully stayed in the top ten since 2005.

Since the October 2022 bear market bottom which was followed shortly by the introduction of ChatGPT in November of 2022, the S&P 500 is up 90%, the “Magnificent 7” technology companies are up 180%, and the other 493 companies in the S&P 500 are up just 25%.  We stay invested in AI infrastructure within our Core Equity portfolio, but we do so in a measured pace.  We’re also constantly looking for companies that have the potential to grow to be one of the ten largest in 2035.

Please see below for portfolio commentary and activity.

Core Equity

Top performing stocks during the quarter included Ciena, Alphabet, Apple, and Chart Industries.  Laggards included Deere, Adobe, and Disney.  Baker Hughes announced on July 29th that they are acquiring Chart Industries.  We purchased Chart in August of last year in order to gain exposure to the need for a diversification of energy sources and the supply/demand imbalance in the liquefied natural gas market.  We exited the position this August after our holding period passed the one-year mark, thereby decreasing the tax impact.  A recap of trades during the quarter:

  • New positions:  Colgate-Palmolive
  • Increased position size: Walmart, Adobe
  • Exited positions: Chart Industries, Constellation Brands
  • Decreased position size: Ciena, Broadcom


Covered Call

On average, five to six options expire each month in our Covered Call portfolio.  If the option expires worthless, we typically sell another option on the same stock.  If the stock price is above the option strike, and the underlying stock is called away, we typically replace the holding with a new covered call position. Trading activity during the quarter:

  • New positions: Walmart, MetLife, Dell, Amazon, Starbucks, Texas Instruments
  • Option rewrites: Apple, TJX, Qualcomm, Union Pacific, US Bancorp, Comcast, Applied Materials, Becton Dickinson, Carrier, Merck
  • Positions called away: Oracle, Citigroup, Hewlett Packard Enterprise, Morgan Stanley, Nike, Sysco, Zimmer Biomet

Diversified Income

Top performing positions during the quarter included State Street, IBM, Whirlpool, and Cisco.  Laggards included Bristol-Myers Squibb, LyondellBasell, and Chevron.  Trading activity during the quarter:

  • New positions: Kinder Morgan
  • Exited positions: Whirlpool, Cisco

Tom Searson, CFA

The analysis and performance information contained herein reflects that of portfolios used by Providence Capital Advisors, LLC, a Securities and Exchange Commission Registered Investment Advisor.   This information should not be relied upon for tax purposes and is based upon sources believed to be reliable. No guarantee is made to the completeness or accuracy of this information.  Providence Capital Advisors, LLC shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, the information, data, analyses or opinions contained herein or their use, which do not constitute investment advice, are provided as of the date written, are provided solely for informational purposes, and therefore are not an offer to buy or sell a security. This information has not been tailored to suit any individual.

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