GQG Partners has been vocal about its view on the AI trade over the last several months, publishing a four-part report from September through early March detailing why it’s a bubble “on steroids” waiting to burst.
In a call with Business Insider this week, the firm doubled down on its views, warning that the S&P 500 could get wrapped up in a selling-spiral if the AI trade starts to unravel.
“The downside risk could be quite material,” said Siddharth Jain, who co-manages the GQG Partners Global Quality Equity Fund (GQRPX), which Morningstar data shows has beaten 98% of similar funds over the last five years.
“The moment AI capex even slows down — forget about contracting — that has major implications. I mean, the latest numbers I’ve seen, for example, the US economic growth — over 50% of US GDP growth last year came from AI Capex,” he continued. “And if you look at the remainder of that, it’s been doing the top 10% income cohort, which is linked to the stock market, so it becomes very reflexive.”
Jain emphasized that he and his colleagues don’t see themselves as perma-bears. In fact, for the majority of GQG’s history since 2016, the firm has been bullish on tech stocks, save for 2021, Jain said.
But the risk of an AI-driven pullback has become too large to ignore, he said, laying out several reasons he thinks the market is vulnerable, many of them being the well-known criticisms aimed at AI stocks recently. Here’s what he’s eyeing:
- Valuations. Broader market valuations are high as expectations are unrealistic, he said. Investors are pricing in annual earnings per share growth in the low teens over the next three years, but this type of growth only comes after recession lows, he said. Beyond public equities, valuations for private firms like OpenAI, Anthropic, and SpaceX are also elevated, he said.
- Capex levels. “One stat I’d like to share is that the hyperscalers today are spending more capex dollars per dollar of EBITDA than the energy sector at the peak of the energy bubble 10 years ago and the telecom sector at the peak of the telecom bubble 25 years ago,” he said.
- Increasing leverage. Hyperscalers will be negative free cash flow this year as they borrow to fund the AI buildout, he said, and firms like OpenAI and Anthropic are dependent on them as they are not yet profitable.
- Circular financing. Jain cited Nvidia as one of the main culprits here. “They announced almost 50 circular financing deals in Q4 2025 alone,” he said. “They’re giving the biggest customers money to buy chips. That is not normal. You saw it in the telecom bubble.”
All that said, Jain and his colleagues have shifted to a more defensive stance in their portfolio, prioritizing high-quality companies that should fare well if the broader market falls and the economy slows.
But GQG’s bet on defensive stocks isn’t just a way to hide out in dependable companies until a potentially AI bubble passes. In a February report, the firm laid out why they’re structurally bullish on defensives, which they define as healthcare, utilities, and consumer staples stocks. Part of the reasoning was that they’re as cheap as they’ve been relative to the top 750 stocks in the market since 1990.
GQG Partners
“To be clear, we never buy anything on the basis of mean reversion. Our process is rooted in assessing business quality, visibility, and durability of earnings, and what we view as a reasonable path for generating high-single-digit to low-double-digit returns,” the report said. “That said, when gaps get this wide, we believe it is impossible to ignore that any normalization has the potential to be additive—and markets rarely normalize ‘politely.'”
In his interview with Business Insider, Jain shared three examples of the defensive stocks his fund is long on at the moment.
3 defensive stock picks
First, Jain highlighted insurance firm Progressive (PGR), the firm’s second-largest holding, with a 4.56% weighting as of December 31.
The stock is high on the quality spectrum and trades at a cheap level of 12-times forward earnings, he said. The last time it was this cheap relative to the S&P 500 was in January 2000, right around the peak of the dot-com bubble, he said.
“We’re incredibly bullish on Progressive,” he said.
The second stock Jain highlighted was his fund’s top bet at 7.66% of the portfolio: tobacco company Philip Morris (PM).
The firm has seen a turnaround in weak growth in recent years due to the success of new products, he said.
“Tobacco — historically, you’ve seen negative volume growth for decades up until two years ago, where now nicotine volumes are structurally growing, driven by IQOS, Zyns, which are becoming quite popular,” Jain said.
And third, he pointed to utilities company American Electric Power (AEP), the fund’s fifth-largest holding at 3.79%.
Jain said the company is benefiting from the structurally higher need for energy and pays a high dividend that helps buffer overall returns.
“There’s a big capex cycle happening from these regulated utilities, so the growth is structurally accelerated from maybe 6% to 9% per year, and you get paid a 3% dividend yield, so 12% compounded returns,” Jain said. “It’s basically a bond.”
