Wall Street execs say the AI stocks dominating the market will soon be split into winners and losers

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Good morning and welcome to First Trade. Yum! Brands had a great day on Tuesday as the rest of the market tumbled, soaring 7% after saying it might offload Pizza Hut. Addition by subtraction!

Rundown

• Alex Karp is sick of short-sellers. The Palantir CEO went off on investors betting against the company's stock, including "Big Short" legend Michael Burry.
• Bitcoin falls into a bear market. Here are the main reasons why the cryptocurrency has dropped more than 20% from record highs over the last few weeks.
• Housing-market deep freeze. Home turnover is at a 30-year low, partially due to owners being locked into low-rate mortgages.

But first, it's time to separate the haves from have-nots.

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Market musings

Like a dispersion

Stock valuations — seen by many as flying too close to the sun — took a hit on Tuesday after a chorus of bank execs spoke up to throw their weight behind that view. Chief among them were Morgan Stanley CEO Ted Pick and Goldman Sachs CEO David Solomon.

Major indexes ended the day firmly in the red, led lower by the same AI-affiliated tech names largely responsible for recent records.

While jarring, this commentary was hardly surprising. The execs were simply pointing out an age-old market truism: sometimes stocks have to go down and reset before continuing their ascent.

Instead, the most interesting takeaway came from what Pick said about 2026, namely that there will be more dispersion.

In simpler terms, the Morgan Stanley chief is saying investors will eventually start separating the wheat from the chaff. Higher-quality companies with strong balance sheets and superior financials will reign supreme, leaving the have-nots in the dust.

A sign of how this could play out in AI happened last week, when Meta's stock price took it on the chin after the company pledged to boost capex spending beyond already-lofty levels in 2026. Compare that to the relatively mild reaction in Microsoft shares, despite them saying basically the same thing. Amazon is still pouring money into AI as well, and its stock was up double digits on earnings.

A main reason? Meta is far less diversified than its AI-focused peers. It doesn't have a legacy cash-cow business like software or cloud computing to insulate it from the twists and turns of the AI trade. Simply put, the companies with the most air-tight financial situations outperform when things get chaotic.

Look at the dot-com bubble for a more extreme example. Countless companies went belly-up, unable to deliver on the market's valuation hype. But an elite group of high-quality companies stayed the course and emerged from the wreckage: Amazon, Apple, Microsoft, Cisco, and Intel, just to name a handful.

That's dispersion in action.

So how can you play the theme in your own portfolio? Lisa Shalett, CIO of Morgan Stanley Wealth Management, recently made some recommendations for quality-seeking investors wary of market bifurcation:

• Take profits in high-beta stocks, small and micro caps, speculative names, and unprofitable companies
• Put that money into large-cap stocks with quality attributes, such as the Magnificent 7 and generative-AI beneficiaries in financials, healthcare, and energy
• In fixed income, shift up the duration curve to 5- to 10-year bonds
• Consider buying international equities and real assets, including gold, real estate, and private infrastructure

Speculative booms are all fun and games until they're suddenly not. Making these shifts can help you proactively play defense against a valuation-driven reckoning.

On the move

Bitcoin has tumbled from all-time highs reached in early October, falling as much as 20% from its peak to below $100,000 on Tuesday. It was the first time since June that the formerly red-hot crypto fell beneath the six-figure threshold.

The drop can be attributed to two main things. First, there was a historic unwinding of bitcoin long positions on Oct. 10 that saw investors liquidate $19 billion across exchanges in less than 24 hours. That was an inflection point of sorts. Second, it's suffered from an overall risk-off move that was also seen in stocks on Tuesday. Bitcoin has traded as a risk asset for months, and Fed Chair Jerome Powell's non-committal approach to a December rate cut has spooked investors.

BI market mix

• Real estate investing tips. BI's Kathleen Elkins talked to investors who expanded to 24 units in a year, who say the BRRRR method can help investors scale fast. They just need to avoid two costly mistakes.
• "Big Short" investor Michael Burry is back at it. He's taken the bold step of shorting Nvidia and Palantir, two of the stock market's foremost darlings. Palantir CEO Alex Karp isn't happy about it, and let everyone know.
• Hedge funder Eric Jackson isn't sweating. The retail-trading hero, who was responsible for the recent meme-stock surge in OpenDoor, says the equity bull market will overcome its latest hiccup.

Chart of the day

This chart puts the valuation worries outlined above in context. As megacap stocks have made up a growing percentage of the S&P 500, their sales have not kept pace.

In the name of preparing for increased market dispersion, it might be a good idea for investors to identify which companies have actually seen revenue keep rising alongside their share prices. This is exactly the type of high-quality attribute Morgan Stanley has recommended traders rotate into.

Culture confidential

Flexing and fitting in: It's vest season on Wall Street

Business Insider's Will Edwards spotlights a hot trend dominating Wall Street and the finance industry.

If there's one piece of clothing that's become synonymous with the finance industry, it's the vest. Stroll around Manhattan at lunchtime on any given weekday, and you'll see swarms of sleeveless coats in all their glory.

Their ubiquity earned a nickname years ago: the Midtown uniform. It's become an internet meme, the first item in a finance bro starter pack, and eyeroll fodder for hipsters who dislike all things basic.

So, with the vest way past the peak of its hype cycle, why are they still such a staple on Wall Street? I hit the streets to find out.

One common reason I heard is that bankers simply like to flex — not necessarily their visible arms, but where they work — as many firms give out branded vests.

"It's an earned status thing. You put in a lot of work to get to equity research for your team, to get to the PM role for a team, to be able to get to that said firm," one analyst told me. "That's why you wear it."

There's also an element of fitting in. Wearing a vest is a shorthand signal that you're part of the club.

That's why people even wear them in the office, out of the elements, said Jonathan Grossman, who is two years into working at UBS.

"They want to look cool," he said. "They want to look part of the act."

Those in finance-adjacent industries like commercial real estate have also started wearing vests. Despite its casual nature, a vest lends you a degree of credibility with financial industry clients, said Laz Rabanales, who works at Okada & Company.

"I'm not a banker, I'm a commercial real-estate agent, and I kind of want to appeal to that industry," Rabanales said. "When you're dressed as that person, then they'll most likely want to talk with you and work with you."

But there's not always a deeper meaning. As one banker succinctly explained: "It's cold out."

— Will Edwards

Joe Ciolli, executive editor and anchor, in Chicago. Akin Oyedele, deputy editor, in New York. William Edwards, senior reporter, in New York. Steve Russolillo, chief news editor, in New York. Huileng Tan, senior reporter, in Singapore.