As artificial intelligence pioneer Anthropic rushes toward its initial public offering, clear cracks are beginning to show across the broader AI trade. These emerging fissures are no longer confined to smaller or fringe players within the technology ecosystem, signaling a potential shift in investor sentiment as the market re-evaluates the immense capital expenditures fueling the sector.
Market anxiety has been mounting for weeks, highlighted by significant pullbacks in specialized infrastructure firms and alternative data center operators. CoreWeave experienced a sharp 15.5% decline in mid-October as yields on its 2032 notes surged to 15% and its default-swap spreads nearly doubled. Meanwhile, shares of IREN have suffered steeper losses, dropping more than 20% over the course of the year.
Last Thursday, the contagion officially spread to chipmakers—a logical transmission point given that a substantial portion of the capital spending by firms like CoreWeave and IREN flows directly into advanced semiconductors. Advanced Micro Devices (AMD) absorbed an 8.1% drop as a combination of Meta’s updated financing plans and a supply chain warning from Lam Research exacerbated mounting data-center fears regarding the pace and sustainability of future AI spending.
Despite this turbulent backdrop, market analysts point out that a selective, disciplined approach to equity screening reveals a very short list of companies capable of generating consistent outperformance over time. When filtering for robust fundamental factors—requiring a share price above the 200-day moving average, revenue growth keeping pace with the broader S&P 500 at 5% or more annually, and earnings per share growing at 7% or higher—the choices narrow dramatically.
Additional stringent criteria include positive rating upgrades, a price-to-earnings growth (PEG) ratio below 3, and a return on equity and return on invested capital of at least 12%. Of the prominent names reporting financial results within a two-week window, AMD stands out as virtually the only major participant that successfully clears every benchmark on the list.
While portfolio strategists routinely advise maintaining slightly lower technology exposure than what is dictated by broad market indices—relying instead on consumer staples and defensive assets to balance risk—completely ignoring the market’s largest and most transformative sector remains difficult for active managers.
This resilience is underpinned by exceptionally strong operational growth that easily clears fundamental hurdles. Consensus estimates for the third quarter call for earnings per share of $1.94 on revenue of $13.06 billion, a steep climb from the $1.20 EPS and $9.25 billion in revenue reported during the same period a year prior. That translates to year-over-year growth of nearly 62% for earnings and 41% for revenue.
Market observers note that the recent share price drawdown was driven by a broader sector-wide sell-off rather than any company-specific negative reporting from AMD. However, the sell-off demonstrates that when sentiment sours on the artificial intelligence trade, even the largest and fundamentally sound players are bound to feel the impact.
Underpinning the long-term bullish thesis for the chipmaker is persistent, high-level demand. In early October, AMD CEO Lisa Su indicated that the company plans to substantially increase semiconductor supply by 2027 because ongoing AI orders continue to outrun available manufacturing capacity.
The Trade
Balancing these proven growth metrics against growing market anxiety requires navigating elevated volatility, particularly through the strategic use of options.
Owning the stock outright heading into an earnings report means absorbing a historically substantial implied earnings-related move, typically ranging between 9% and 11% on the day of the announcement. Over the past four quarters, the smallest move over a comparable window has exceeded 9%, while the largest surge—following the release of the company’s first-quarter results—reached an astonishing 38%.
That level of historical volatility ensures that options premiums remain exceptionally rich, making a straightforward purchase of call options an expensive and potentially risky proposition.
Employing a call spread risk reversal strategy offers a dual mechanism to address these market dynamics. It effectively mitigates downside risk if sector-wide cracks continue to widen, while the short options help offset the elevated volatility that investors would otherwise be forced to pay for outright.
By strategically sacrificing a portion of potential upside during a strong rally in exchange for substantial downside protection, investors can maintain exposure to the trade with considerably reduced risk. While selling options ties up a degree of cash, the capital requirement is lower than simply buying the underlying stock, and executing the combined spread successfully reduces the long call purchase cost significantly.
(Disclosures: Tidal owns and holds all the securities mentioned in this article. All opinions expressed by contributors are solely their own and do not reflect the views of CNBC, its parent company, or affiliates. This content is provided for informational purposes only and does not constitute financial, investment, tax, or legal advice.)
