A prominent trader has issued a warning about the growing dependence of the market on the artificial intelligence (AI) narrative, characterizing the coming IPO wave involving SpaceX, OpenAI, and Anthropic as “the coup of the century.” Larry McDonald, founder of The Bear Traps Report and a former Lehman Brothers trader, cautioned that passive investors could be vulnerable, particularly as rapid index inclusion may compel retirement funds to invest heavily in SpaceX shares regardless of their actual valuation. SpaceX is reportedly gearing up for its IPO roadshow in the coming days.
In overnight trading, shares of Tesla, Inc. (TSLA) fell by 1%, coinciding with rising speculation of a possible merger between Tesla and SpaceX. This dip occurred amid concerns voiced by McDonald, who suggested that investors pursuing the anticipated blockbuster SpaceX IPO might be repeating errors made during the dot-com bubble, notably the excessive optimism surrounding Amazon before its 90% stock decline. In contrast, the Direxion Daily TSLA Bull 2X Shares ETF (TSLL), which mirrors Tesla’s daily performance, saw a 2% drop, while its counterpart, the GraniteShares 2x Short TSLA Daily ETF (TSDD), gained approximately 2%. Notably, despite the recent decline, TSLA managed to record its best monthly performance since September.
McDonald expressed skepticism about SpaceX’s high valuation, comparing the current situation to the investment climate surrounding Amazon in early 2000. He noted that achieving a $2 trillion valuation would necessitate space-related revenue projections reaching an implausible $1.5 trillion to $1.9 trillion for investors to expect gains akin to those from Tesla, which he described as “astronomically unrealistic.” His remarks came as SpaceX prepares for what could become one of the largest initial public offerings in Wall Street history, aiming for a valuation of at least $1.8 trillion and plans to raise up to $75 billion. Controversy arose recently when Elon Musk dismissed reports suggesting a downward adjustment of the valuation target from over $2 trillion, labeling them as “false.”
In its IPO filing, SpaceX reported revenues of $18.7 billion in 2025 and $4.7 billion for the first quarter of 2026, alongside ambitious goals including reusable rockets, broadband through Starlink, AI infrastructure, and even Mars colonization. McDonald highlighted an emerging trend where investors are increasingly focused on AI advancements, claiming that “the stock market is drunk on a narrative” and that AI has come to dominate market discussions. He expressed concern that hype surrounding future earnings is overshadowing considerations of competition, delays, and execution risks.
McDonald identified SpaceX, OpenAI, and Anthropic as pivotal deals that could shape the current AI-driven market cycle. He drew parallels to past market milestones, suggesting that the current fervor surrounding AI-related IPOs could trigger a downturn similar to previous cycles marked by landmark mergers like the AOL-Time Warner union. He emphasized the rapid increase in valuations, noting that the combined worth of SpaceX, OpenAI, and Anthropic has surged from approximately $760 billion a year ago to $3.5 trillion today, which he condemned as “pure madness.”
A key aspect of McDonald’s warning focuses on the risks posed to passive investors and retirement accounts. He articulated concerns that rapid inclusion in major indices like the S&P 500 and Nasdaq-100 could compel index funds to accumulate significant amounts of SpaceX shares without considering their valuation. Describing this phenomenon as “the dark side of passive investing,” McDonald remarked that passive investment strategies are now so sizable that they can distort the market whenever substantial companies enter major indices. According to his analysis, SpaceX might emerge as one of the largest corporations within the S&P 500, leading to an estimated half of its publicly traded shares being held by passive investors. He cautioned that this scenario would effectively “hijack” the retirement savings of countless individuals.
In an urgent appeal on social media, McDonald urged investors not to overlook these risks, warning them that their 401(k) accounts may be at significant risk. Recent changes to index inclusion rules by Nasdaq and FTSE Russell aim to allow faster entry for mega-cap IPOs, putting additional pressure on indices. Estimates suggest that if S&P follows suit, passive funds could be on the hook for nearly $20 billion worth of SpaceX stock.
The conversation around these developments is intensified by speculation of tighter interrelations among Musk’s various companies, particularly Tesla, SpaceX, and xAI. During a recent interview, Musk’s cautious comments on the potential for synergistic operations among some of his businesses further fueled discussion. SpaceX recently acquired a stake in xAI for $1.25 trillion in stock, while Tesla was granted permission to convert a prior investment into a stake in SpaceX, strengthening the connections between Musk’s ventures.
As for the sentiment in the market, discussions on platforms such as Stocktwits indicate a bearish outlook for Tesla, while sentiments surrounding SpaceX appear more optimistic, with high levels of engagement. Despite some investors expressing fears about a potential drop in stock value due to a merger, others question whether Musk’s comments regarding a merger are an attempt to prevent mass sell-offs of Tesla shares.
Overall, the upcoming IPOs and market dynamics surrounding SpaceX, Tesla, and AI-related technologies continue to draw intense scrutiny and varying investor sentiment.
