Temasek Warns AI Trade Unwind Is Biggest Market Risk, Sees Possible 2027 Bumps

Sipahimalani said AI has been one of the key forces keeping U.S. stocks near record highs even as Treasury yields have surged, pointing to earnings strength at major companies tied to the technology. The S&P 500 has remained around record territory despite higher borrowing costs, supported by AI and the earnings momentum around key players, he said.

He said strength at the index level masked weakness beneath the surface. About half the stocks in the Russell 3000 were at least 20% below their June highs, Sipahimalani said, highlighting how much the market’s resilience has depended on a small group of winners.

A reversal in the AI trade could be triggered by several factors, he said, including safety concerns that lead to tighter regulation or signs that customers are failing to generate sufficient returns from their spending on the technology.

Temasek remains bullish on AI over the longer term and has continued to increase investments into the sector. About half of its AI exposure is currently in publicly traded assets, a proportion it would ideally raise to around 70% to 75%, Sipahimalani said. That would give Temasek greater ability to adjust its investments as the industry evolves, compared with private assets that can be harder to exit quickly.

“One of the things we recognize is that AI is such a fast-changing environment that things could change quite easily, and you have to be able to pivot,” he said.

Temasek has invested in private AI model developers such as OpenAI and Anthropic, but the size of that exposure would be different compared with some other areas where it has more flexibility, Sipahimalani said.