Is It Time to Shift Out of the Hottest AI Stocks and Into the Next Tier of Winners?

The market's recent decline has undoubtedly rattled many investors. The sell-off hit artificial intelligence (AI) stocks hard as high valuations, massive investments in capital expenditures (capex), and the uncertainty about future rate cuts have undoubtedly weighed on the minds of investors.

Such questions may lead investors to assume that they need to abandon the hottest AI-oriented tech stocks and look to the next round of "winners." Those feelings are understandable, and times like this should prompt a reevaluation of one's holdings. Nonetheless, this is likely a time to hold to time-tested investment principles rather than chase the next hot stocks, and here's why.

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Where AI stocks stand now

First, investors should remember that the effects of the sell-off are most significant on certain individual stocks. Despite the declines in some of the top AI stocks, the Nasdaq is down by only 7% at the time of this writing. That means it is far short of correction territory, which most analysts define as a drop of 10% or more.

Still, a top AI stock like Nvidia (NASDAQ: NVDA) may offer a different story. It is down 14% from its high, indicating a correction. Additionally, despite concerns about trading in bubble territory, Palantir Technology's current 25% decline puts it in bear market territory, defined as a decline of 20% or more.

Instead, the most notable sell-offs have come from smaller stocks, such as CoreWeave, which is down 60% since June. Additionally, the drop in these stocks could easily continue, and investors have not seen any meaningful signs of relief as of the time of this writing.

Interest rate effects

Moreover, most investors had assumed that a December interest rate cut by the Federal Reserve was a near certainty before the central bank wavered on this prospect.

Admittedly, interest rates matter little to some companies. A company like Google parent Alphabet, which holds around $98 billion in liquidity, can afford the staggering $91 billion to $93 billion it plans to spend on capex this year.

However, smaller AI companies such as CoreWeave are in a different situation. It sustained massive losses as it borrowed heavily and spent over $6.2 billion in the first nine months of 2025 on capital expenditures (capex) to meet demand. Thus, if it has to pay higher interest rates than it had anticipated, it could slow a potential recovery.

What investors should do

Given these challenges, investors should probably focus less on finding the next multibagger and instead look for great companies at fair prices, as Warren Buffett advises.

For one, such advice makes sense since we are in a sell-off. If the selling continues, investors could find themselves in a situation where no company fits their definition of a "hot stock."

Furthermore, finding such stocks before the fact is extremely difficult. For example, Nvidia has increased in value by more than 1,400% since October 2022. Still, few could have foreseen its massive success in the AI accelerator market, and likewise, the next hot stock might be just as difficult to find.

Knowing that, investors should consider seeking stocks with the potential to outperform the market rather than looking for the winner. Such an approach may or may not get an investor into a "hot stock," but it increases the likelihood of earning market-beating returns.

Stick to tried-and-true investing principles

Instead of focusing on potential winners, investors should probably follow Buffett's advice and seek great companies at fair prices.

Indeed, we have experienced a significant decline in AI stocks. This could signal the end of the boom or merely a correction.

Nonetheless, this sell-off is probably a sign to stop looking for the next Nvidia or Palantir. Moreover, winners will likely emerge over time, but they are nearly impossible to predict before they start making significant gains.

Ultimately, the approach recommended by Buffett may or may not deliver outsized gains. However, it will increase the likelihood of earning market-beating returns in the long run, a path that should ultimately benefit the investor.

Will Healy has positions in CoreWeave. The Motley Fool has positions in and recommends Alphabet, Nvidia, and Palantir Technologies. The Motley Fool has a disclosure policy.