Wall Street and everyday investors are taking two very different approaches to the recent AI selloff.

Institutional investors are spending billions to protect themselves against potential trouble in the AI sector.

Meanwhile, aggressive traders are pouring record amounts into leveraged funds designed to triple the daily moves of semiconductor stocks.

So why are some investors protecting themselves against an AI downturn while others are making increasingly aggressive bets on a rebound?

Here’s what these opposing bets are telling us… and how to position your own portfolio.

Wall Street is getting nervous about AI

In September, more than $9 billion worth of credit default swaps (CDS) tied to seven major AI-related companies traded each week, on average. That’s up from less than $2 billion in July.

A CDS works like an insurance policy on a company’s debt. The buyer pays a yearly premium, and if the company can’t pay its bonds, the policy pays out.

One of Wall Street’s biggest concerns is the enormous debt financing the AI boom.

Building data centers, purchasing advanced chips, and securing enough electricity to power everything requires enormous upfront investment. And companies are increasingly turning to debt to cover those costs.

According to Morgan Stanley, AI-related borrowing has reached an estimated $466 billion so far in 2026, compared with $101 billion during the same period last year.

That’s a massive increase in financial obligations at a time when investors are still trying to determine how quickly AI spending will translate into profits.

If AI revenue grows more slowly than expected, companies could struggle to generate enough cash to cover their borrowing costs while continuing to invest in new infrastructure.

Moreover, with interest rates elevated, that debt is becoming more expensive to finance.

The cost of protecting against defaults has also climbed. For example, five-year protection on Meta’s debt reached 108 basis points. Put another way, it now costs $108,000 a year to insure $10 million of Meta’s debt. That’s a record high for the company.

While that remains relatively inexpensive compared with insuring the debt of riskier companies, the increase shows that investors are demanding more protection even against financially strong technology giants.

To be clear, that doesn’t mean Wall Street expects Meta or other major technology companies to default. The takeaway is that Wall Street is becoming more cautious about the financial risks behind AI’s massive expansion.

Simply put, big money isn’t abandoning AI… but it is paying for a safety net.

Aggressive traders are betting on a rebound

While institutional investors are becoming more cautious about AI’s financial risks, other traders are making some enormous bets on a recovery.

Last week, roughly $7 billion poured into the Direxion Daily Semiconductor Bull 3X ETF (SOXL), a record inflow for the fund.

SOXL is designed to deliver three times the daily performance of a semiconductor index. So if the index rises 2% in a single trading session, SOXL aims to gain 6%—and vice versa on the downside.

(It’s important to note that leveraged ETFs are daily instruments, so they’re designed for short-term trades. Their long-term results can vary significantly.)

What’s particularly striking is the timing.

Investors poured billions into SOXL even as semiconductor stocks suffered one of their worst weeks of the year. The Philadelphia Semiconductor Index fell more than 11%, while SOXL lost roughly a third of its value.

Essentially, these buyers are betting the selloff has gone too far, and chip stocks are due for a sharp recovery. And if they’re right, a leveraged fund could deliver enormous short-term gains.

How to play the AI selloff

The surge in credit default swaps tells us Wall Street is paying closer attention to the financial risks behind the AI boom.

Meanwhile, the rush into leveraged semiconductor funds shows that plenty of traders are still betting on a quick recovery.

Both trends deserve attention. But neither tells us exactly where AI stocks are headed next.

The long-term outlook for AI remains promising. Demand for chips, computing power, and data center infrastructure continues to grow.

At the same time, the enormous cost of building that infrastructure means some companies are taking on far more financial risk than others.

That distinction matters for investors looking to take advantage of the recent selloff.

Companies with strong cash flow, manageable debt, and established demand for their products are generally better positioned to weather a prolonged downturn. Businesses relying heavily on borrowed money and optimistic growth projections have much less room for error.

And with AI stocks still facing uncertainty, there’s good reason to be selective.

Rather than making a large bet on an immediate rebound, consider starting with smaller positions in financially strong technology companies that have fallen to more attractive prices.

Keeping some cash on the sidelines also gives you the flexibility to add to those positions if the selloff continues.

That way, you can participate if AI stocks recover, without putting yourself in a position where you need a quick rebound to avoid substantial losses.

The opportunity in AI remains enormous. But as Wall Street’s growing caution shows, managing risk is becoming just as important as identifying the next big winner.

Want to know where Frank is putting his money amid the AI selloff? Get every stock recommendation and trade alert when you join Curzio Alpha.