A top analyst warned of a ‘prisoner’s dilemma’ and ‘AI wobble’ in the stock market just days before Palantir seemed to confirm everyone’s fears

The comments came from Tony Yoseloff, managing partner and chief investment officer at Davidson Kempner Capital Management, in a conversation with Goldman Sachs’ Tony Pasquarello on the podcast. Stock exchanges: big investorswas recorded on October 20 and released 11 days later.

Yusilov asked some hypothetical questions about the much-publicized question of “circular finance” in AI, where the same companies fund each other and also sell to each other.

“So the way I like to think about it is: Will there be volatility in AI at some point? Will investors be concerned about how to invest those VC dollars?”
“There’s a kind of prisoner’s dilemma, let’s call it, among big companies,” he continued, referring to a famous game theory scenario. “You have to invest in them because your peers are investing in them, so if you fall behind you don’t have a stronger competitive position.”

The investor went on to compare today’s extreme concentration — with 10 stocks commanding 40% of the S&P 500’s weight — to historical bubbles like the “Nifty Fifty” of the early 1970s and the dot-com boom of the millennium. He warned that in those periods, investors waited up to 15 years just to recover their losses after valuations collapsed.

The “big sell” bet and the market response

The alarming message has become almost synonymous with famed investor Michael Burry, who famously profited from the mortgage meltdown, unveiling a $1.1 billion short position against leading AI companies Nvidia and Palantir in early November. His move sent shockwaves through global markets already jittery about the narrowness of tech gains: Bank of America research analysts noted that the “Hot 7” tech stocks contributed more than 80% of the S&P 500’s total returns last month, raising fears of a reversal.

Markets responded violently. Palantir shares, which were up 154% year-to-date and were up 7% after third-quarter earnings initially, reversed course and fell nearly 8% in one day. Asian and European indices followed suit, highlighting how global sentiment is tied to a handful of AI leaders. In South Korea and Taiwan, for example, one or two technology stocks accounted for nearly half of the national index’s returns, illustrating the “volatility” risk Yusilov faces: any crack in confidence could trigger a quick and severe correction.

Palantir CEO Alex Karp was typically angry and blunt when he appeared on CNBC’s “Squawk Box” the next day, when asked specifically about Burry’s short position. Karp responded that when he heard about short sellers attacking his company, “what I think is clearly the most important software company in America, and therefore in the world,” he said, “is very interesting, because these people, they can pick any company in the world. They have to pick the company that actually helps people, that makes money for the average person, that actually supports our fighters in the war.” Karp added that this is “a crazy trigger” and believes that “short sellers are constantly getting scammed by Palantir.” The company’s stock fell another 2% on Wednesday.

As for Karp’s take on the company’s success, Palantir posted a record quarter with revenue of $1.18 billion, beating estimates and boasting U.S. government contracts were up 52% ​​year over year. Karp’s combative tone in the earnings call, where he touted his “anti-woke” approach and Palantir-government synergy, did little to allay investors’ fears. Analysts expressed concern that even strong sales and guidance “do not justify its valuation” given the scale of capital expenditures and uncertain returns from AI-driven bets. In their view, Palantir has a massive price-to-earnings ratio of more than 100 times.

Karp brushed off critics of Palantir’s strategic direction, but a closer look at the trading floor suggests his boasts don’t fit with the structure of the market. Yusilov’s warnings about the prisoner’s dilemma – where big tech companies engage in costly, self-reinforcing arms races because they cannot afford not to invest – seemed justified, as even strong results led to a flurry of news selling. Top Wall Street executives piled in, with Goldman’s David Solomon and Morgan Stanley’s Ted Beck both predicting corrections of up to 20% to stock valuations.

With analyst warnings and high-level actions heralding a potential regime shift in the markets, the “volatility” of the AI ​​sector may only be just beginning. As Palantir’s rapid transformation shows, confidence in continued AI-driven growth is no longer bulletproof. If the “prisoner’s dilemma” persists, there is a risk that “dead capital” will haunt technology valuations for years to come – as has happened after past bubbles.

However, for experienced investors like Yusilov, the period ahead promises not just volatility but new opportunities, with “absolute return strategies” flourishing when markets finally impose a separation between real winners and losses caused by unfulfilled expectations. In this sense, fears that Palantir’s earnings will be insurmountable may prove to be the next big turning point in the financial world.

For this story, luck Use generative AI to help with the rough draft. An editor verified the accuracy of the information before publication.