A dot-com survivor warns retail investors against buying the tech dip: 'You're taking a knife to a gunfight.'

By Barbara Kollmeyer

Tech veteran Ted Mortonson's advice is to look out for sideways movements from stocks

Finger pointing on stock exchange market chart, raising graph. Business and investment growth

After a recent stretch of selling in the S&P 500, driven by worries about companies spending on artificial intelligence, investors don't seem to be rushing back in to buy beaten-down stocks, at least not yet.

That would be wise, according to Baird technology strategist Ted Mortonson, who said buying the dip is possibly "the worst strategy going forward" for the retail crowd, according to an interview he gave to the Excess Returns podcast that was released Saturday.

Following a cycle of "overexuberant speculative greed" in 2024 and 2025, retail-investor behavior has recently shifted into "concern and fear," though it hasn't yet reached the "panic and capitulation" phase seen during the 2000 dot-com bust, Mortonson said.

The veteran strategist has covered the sector for three decades and regularly talks to more than 100 technology portfolio managers on the institutional side. He said those institutional managers sold semiconductor names as they started to rally this year, which helped limit their losses as chips fell out of favor - but they aren't ready to buy back yet. The PHLX Semiconductor Index is up 52% this year, on pace for its best year since 2023, when it rose 64%, according to Dow Jones Market Data. However, it's down 26% from an all-time high reached June 22, and has lost 14% in October, putting it on track for its worst monthly return since July.

However, they aren't ready to buy back just yet, he said.

Futures were pointing to a cautious start for the S&P 500 (ES00), which logged a 2.4% decline over the past two weeks, its worst such performance since late March, including one sharp selloff last Thursday.

"Sometimes you just have to have the patience to push away from the table and not do anything, and one of the biggest lessons I learned in 2000 is you don't buy a market until some of your key names have based and get kind of the dead man chart where they just go sideways for a few weeks," he said.

At that point, most of the selling of those stocks has likely taken place. "I don't think we'll get capitulation this cycle, but we could have some real damage in a few days if these macros go sideways," he said.

Among his top macroeconomic concerns are midterms, which could bring a tougher climate for data-center building, and a reboot of hostilities around the Iran war after the elections. Critical vulnerabilities in PHP - a commonly used programming language - that website operators are rushing to patch are also concerns among managers he's speaking to.

"There can be some brutal sector rotation that you just have to be aware of and institutionally we're trained to watch for those. From the retail perspective, you're taking a knife to a gunfight, we're generally about six months ahead of you."

Mortonson said the AI cycle will be unlike anything ever seen before, because the infrastructure build-out for companies adapting to that will run probably through 2030. He said 70% of the Forbes Global 2000 largest companies are behind on upgrading their systems for AI, which could take a couple of years, followed by an even longer enterprise-adoption phase. While investors worry about near-term spending by tech companies in their AI build-outs, he said in a couple of years it will pay off as businesses finally adopt the technology and drive higher demand for AI computing power.

"Right now as we speak, the demand for compute is insatiable; it's not even close to supply," he said. "Most of the names that I'm familiar with that are the winners can only supply 70% of contracted demand; 30% is going into backlog."

Mortonson said that dominant large-cap companies and monopolies with lots of free cash flow will be the winners of the AI investment cycle, such as Amazon (AMZN), Meta (META), Microsoft (MSFT) and Alphabet (GOOGL), along with SpaceX (SPCX). Of that group, two or three will rise to the top. A second tier of winners will include security, optical memory and advanced logic companies.

Small-cap companies won't be able to compete in the AI investment cycle because they lack cash flow, but will be the target of takeovers over the next two years, notably those in security and application-software solutions.

Mortonson offered one final thought on whether markets can absorb massive initial public offerings from AI giants like Anthropic. He said if the institutional managers he talks to have to absorb too many AI IPOs in a quarter or two, they will have to sell something else in their portfolio to make room for those, because they don't hold more than 4% cash in their portfolios.

"That's what I think the retail consumer has got to understand that, if the IPO market truly gets turned on right now, it's very impacted," he said.

-Barbara Kollmeyer

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10-26-26 0810ET