Key Takeaways
- • Thomas Hayes, founder and managing member of Great Hill Capital, expects the 'unmagnificent 493' (the S&P 500 constituents excluding a handful of large tech companies) to drive the market's rally over the next six months.
- • Hayes argues AI investment is shifting from infrastructure suppliers, whose margins he views as unsustainable as competition and supply expand, toward firms that use AI to raise productivity and profit margins.
- • He cites a roughly four-year semiconductor and memory-chip cycle and says the costs of frontier AI model development have 'spiraled out of control.'
- • Hayes is bullish on Comstock Resources, Alibaba (including its stake in Moonshot AI, which he said could go public at a valuation of up to $50 billion), Crown Castle and GXO Logistics.
- • He says the 10-year Treasury yield at 5.30% offers a more attractive risk-adjusted return than equities, and that capital rotation out of large-cap tech has already begun.
Summary
Hedge fund manager Thomas Hayes, founder and managing member of Great Hill Capital, argues that investors are overlooking a broadening of the U.S. equity market even as the S&P 500 remains dominated by a few large technology stocks. In an interview on a podcast hosted by David Lin, Hayes said he expects the 'unmagnificent 493' to be the primary driver of the market's rally over the next six months. He notes that because index weights are highly concentrated, the S&P 500 and Nasdaq may fail to reflect broad gains if the largest AI-related weightings underperform.
Hayes's thesis rests on a shift in AI investment dynamics. He believes the 'commoditization' trade in AI infrastructure, particularly memory-chip stocks, has run its course. He described memory-chip cyclicality with the commodity saying 'high prices cure high prices': shortages prompt capacity expansion, and by the time new supply arrives, demand may have slowed, compressing margins. He also questioned the economics of frontier model development, arguing that the free cash flow targets OpenAI and Anthropic must meet to justify their valuations are excessively stringent. His own firm, he said, uses AI internally to boost productivity and runs open-weight models, including those from Mistral AI, Alibaba's Qwen and Meta's Llama.
Among specific holdings, Hayes is bullish on low-cost natural gas producer Comstock Resources, which sits near Gulf Coast export terminals and is positioned to benefit from data center power demand in eastern Texas. He is also positive on Alibaba, citing its stakes in numerous Asian AI startups, and on tower operator Crown Castle and logistics provider GXO Logistics, whose businesses depend on broader economic activity rather than AI chip sales.
Hayes says capital is rotating from the Magnificent Seven toward healthcare, utilities and consumer staples, while rate-sensitive homebuilders are beginning to strengthen. He attributes part of the shift to fixed income: he cited the 10-year Treasury yield at 5.30% and argued that equities offering an uncertain 5% return are less attractive for investors bearing volatility risk. He characterized the rotation as already underway rather than a future scenario.
Hayes's thesis rests on a shift in AI investment dynamics. He believes the 'commoditization' trade in AI infrastructure, particularly memory-chip stocks, has run its course. He described memory-chip cyclicality with the commodity saying 'high prices cure high prices': shortages prompt capacity expansion, and by the time new supply arrives, demand may have slowed, compressing margins. He also questioned the economics of frontier model development, arguing that the free cash flow targets OpenAI and Anthropic must meet to justify their valuations are excessively stringent. His own firm, he said, uses AI internally to boost productivity and runs open-weight models, including those from Mistral AI, Alibaba's Qwen and Meta's Llama.
Among specific holdings, Hayes is bullish on low-cost natural gas producer Comstock Resources, which sits near Gulf Coast export terminals and is positioned to benefit from data center power demand in eastern Texas. He is also positive on Alibaba, citing its stakes in numerous Asian AI startups, and on tower operator Crown Castle and logistics provider GXO Logistics, whose businesses depend on broader economic activity rather than AI chip sales.
Hayes says capital is rotating from the Magnificent Seven toward healthcare, utilities and consumer staples, while rate-sensitive homebuilders are beginning to strengthen. He attributes part of the shift to fixed income: he cited the 10-year Treasury yield at 5.30% and argued that equities offering an uncertain 5% return are less attractive for investors bearing volatility risk. He characterized the rotation as already underway rather than a future scenario.
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