Losing money has never looked this fashionable. Wall Street has decided that the hottest stocks right now are the ones that lose money, with companies reporting negative earnings outperforming those that actually turn a profit. It’s the kind of market where vibes beat valuation, and losses are just part of the aesthetic.

Profitless boom: Around 40% of companies in the small-cap Russell 2000 index have no or negative earnings — yet their stocks have been soaring. Apollo Global’s chief economist Torsten Slok called it “something remarkable,” as most of these unprofitable stars are tech companies riding the AI wave. Former Pimco CEO Mohamed El-Erian believes investors are “reaching further and further for returns, pushed there by the widespread compression in risk premiums.”

• Bank of America labeled stocks “frothy to bubbly,” noting the S&P 500 is now richer than it was during the 2000 dot-com boom on nine of the 20 metrics they track.
• JPMorgan tracks a basket of 30 AI stocks that now make up around 44% of the S&P 500’s market value — creating concentration risk that could amplify any downturn.

The Price of Euphoria

The IMF warned that “valuation models show risk asset prices well above fundamentals, raising the risk of sharp corrections.” It cautioned against potential “disorderly” selloffs and self-reinforcing doom loops, where shaken confidence could trigger failures across markets and shadow banks.

• However, echoing those fears, JPMorgan’s Jamie Dimon warned that “you have a lot of assets out there which look like they’re entering bubble territory.”
• Still, investors expect central banks to step in with rate cuts or asset purchases if turmoil hits — a belief reinforced repeatedly since 2008, despite policymakers’ warnings.

Hedging for the best: Financial advisers are steering investors toward equal-weighted ETFs that spread risk more evenly across companies, easing the impact of AI-fueled market swings. Alternative approaches include investing in international markets and safeguarding positions by betting on gold. Others are sticking with defensive picks like Johnson & JohnsonJNJ

and Eli LillyLLY

, which look far more reasonable at 17.3x expected earnings than overheated tech valuations. It’s tempting not to hedge when everything’s working and caution feels like the only losing trade. However, what goes up rarely forgets to come down.