Upbeat music plays throughout.
Narrator: AI is everywhere. It's in your search results, it's in your text messages, your emails. It's summarizing your meetings at work and it's even popping up in places you might not expect.
On-screen image of headline from The American Society of Mechanical Engineers. Headline says, "AI is the center of rail innovation."
In fact, almost eight in 10 companies report using generative AI. Some of the biggest names, like the Magnificent Seven, are betting big on the technology.
Animation: List of Magnificent Seven includes Nvidia, Amazon, Apple, Meta, Microsoft, Tesla, Alphabet.
Year to date, three of their stocks are up more than 20%, and they're all pouring billions of dollars into AI research and infrastructure.
Animation: Chart shows 2025 year-to-date stock performance of Google, Meta and Nvidia. All three are up year to date between 20% and 30% as of September 5, 2025.
Studies estimate the value of AI in general to be somewhere between 11 and 18 trillion dollars.
Eight in 10 companies—the same number that report using AI—have also reported it's had no significant impact on the bottom line. Yep, you heard that right. No impact on their bottom line.
This lack of revenue impact for AI adopters combined with incredible price growth of AI creators is fueling concerns about a possible AI bubble.
Famed investor Ray Dalio, Alibaba's Joe Tsai, some economists—even OpenAI's Sam Altman himself—have expressed concerns that a bubble may be forming.
In fact, at least one economist warned AI has become a bigger bubble than the Dot Com bubble of the 90s.
Heightening concerns is the level of concentration the overall market indexes have in these big tech stocks. Nvidia alone made up 8% of the overall market cap of the S&P 500 as of August 2025.
Animation: Chart shows top five S&P 500 stocks weighted by market cap. The market cap of the top five stocks has increased from around 14% in 1990 to nearly 30% in 2025.
Schwab Senior Investment Strategist Kevin Gordon: The concentration issue… it definitely exists. But I think it also has to be looked at in context of the fact that a lot of these companies have become significant drivers of overall income growth for the S&P 500. Nvidia—which is the largest company in the S&P 500, it's in the tech sector—it's market cap is approaching where the entire healthcare sector's market cap is.
Narrator: That's Schwab's Senior Investment Strategist Kevin Gordon. Kevin also said AI capital expenditure spending has driven the growth of GDP for the first half of 2025. The annualized growth of business investment in information processing equipment is close to 40%, which we haven't seen since the 90s.
But it's a little more complicated than just seeing concentration and calling it a bubble.
Kevin Gordon: The companies that are sort of at the forefront of that economic growth… They have relatively more solid fundamentals today, and in many cases they have actual fundamentals. And that to me is an important distinction between today and back then, back then being the late 90s. when you look at the factor or the characteristic in the stock market that was the most positively correlated with the market's returns, meaning what was sort of driving the market higher… it was negative earnings. So it was companies that didn't have any earnings growth yet were being bid up consistently and saw relatively significant gains. Today, there are much more positive earnings revisions and actual profit margins and actual profits that are driving the market higher. Today, yes are there sometimes euphoric characteristics of the market? Absolutely. But is it totally unjustified from a fundamental aspect akin to what we saw in the late 90s? Not necessarily.
Narrator: If a bubble exists and it does pop, it could lead to major stock losses, worsened because of the level of concentration in AI in the largest companies. It also has the potential for larger economic fallout.
So, if you're concerned about the potential for a downturn, let's talk about ways you might manage risks in your portfolio. Long-term investors try to keep a broader perspective by holding a diversified portfolio, which is just a fancy way of saying "don't put all your eggs in one basket." That way, your investments are spread across different securities and asset classes in hopes of offsetting losses in one investment with gains in another. This can help weather market volatility. While markets historically tended to go up, it has often been a rough ride, and past performance is no guarantee of future success.
Animation: Chart shows S&P 500 cumulative return from the 1960s to today, rising steadily.
Kevin Gordon: I think that one of the things that needs to be a focal point is figuring out where your time horizon and where your risk tolerance lines up. I think this is one of those moments where you need to figure out and look at your portfolio to see where those align.
Narrator: By slightly shifting allocation away from the so-called Magnificent Seven, even if you're bullish on AI, a portfolio will still have other irons in the fire so to speak with companies that have sound fundamentals and a strong history of performance.
For an index fund investor worried about concentration, consider choosing funds that use different weighting formulas. You could find funds that are equally weighted, or even fundamentally weighted. That doesn't totally negate risk though. Investors avoiding market cap weighted investments could miss out on the gains if the big stocks continue to provide incredible returns.
Kevin Gordon: As it pertains to anything specifically AI related, I think one of the ways to hedge and diversify around that is actually thinking about the difference and the important distinction between the AI creators and the AI adopters. And so much of the focus over the past couple of years, since we've been in this AI craze if you want to think about it that way, the focus has been on the creators. We've spent a lot of time thinking about who are the "adopters" and who could benefit from the technology, and I think that's going to become an important next leg of the cycle for industries that don't have the ability to be the AI creator.
Narrator: You could also consider reallocating some funds out of mega caps with an eye toward other large-cap or mid-cap companies or adjust allocation away from stocks, but this also opens up the risk of missing out on gains, or if there's a big crash, you may still lose either way.
Who knows, maybe the Dallas Fed is right, and we'll end up in an AI utopian "world in which the fundamental economic problem [of] scarcity is solved." Or maybe their other scenario where "machines become malevolent" and eventually lead to human extinction… That could happen too.
One thing is for certain: AI has the attention of the largest corporations and their investors. It's just a question of how much attention it retains in the long term and how that might affect your portfolio.
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