Paul Singer warns of 'FOGO' risk as AI-driven rally shows signs of strain

Elliott Investment Management, which reported $80.3 billion in assets under management as of June 30, warned investors that the rapid rise in AI-related spending could reverse if confidence in the sector wanes. In an investor letter reviewed by The Wall Street Journal, the firm introduced the acronym “FOGO” – fear of getting obliterated – to describe a scenario where the fear of missing out turns into a sharp market decline.

The firm likened the current environment to the speculative years before the Great Depression, citing persistent inflation, large federal deficits and debt-financed bets on AI infrastructure as potential triggers. A pullback in any of these drivers, it said, could force lenders to tighten financing for data-center projects, slowing growth for developers and their suppliers.

October saw the Nasdaq Composite fall 5.3% and the S&P 500 slip 0.9%, with the Nasdaq-100 dropping 6.6% amid concerns that AI spending was outpacing near-term cash generation. While the broader market remained resilient – nine of the S&P 500’s 11 sectors posted gains and the equal-weight index rose 5% – the sell-off highlighted vulnerability in the AI trade.

Elliott’s own performance lagged the S&P 500 in the third quarter, posting flat returns and a sub-2% gain for the first nine months, roughly 11 percentage points below the benchmark. The firm said it uses hedges to protect against adverse market moves and keeps cash on hand to buy assets if prices fall sharply.

Singer’s warning underscores the possibility that a few adverse developments could unwind the rally built on cheap financing and high expectations for AI, and he advises investors to maintain sufficient liquidity to take advantage of potential price declines.