Earlier in 2026, economic commentator and NYU professor Scott Galloway warned that with approximately 40% of the S&P 500 tied to AI-focused businesses, investors may need to reevaluate their risk exposure or face a potential portfolio wipeout.

"There's no way they can justify these incredible valuations," Galloway said on an episode of The Diary of a CEO podcast (1). He also identified cheaper Chinese AI alternatives as one of the greatest threats to American AI companies.

Galloway explained that the "majority of GDP growth over the last two years has come from AI," and that if that momentum slows, the U.S. would plunge into a recession "immediately."

Data from the Federal Reserve Bank of St. Louis supports this assessment. The Fed found that 39% of total GDP gains in the third quarter of 2025 were driven by AI growth in areas such as software, R&D, information processing technology, and data center construction (2).

This trend appears set to continue. Goldman Sachs estimates that AI investment spending could account for 40% of S&P 500 earnings growth in 2026, while major cloud companies are expected to collectively spend $674 billion on capital expenditures this year alone (3) — a sum exceeding the annual economic output of many mid-sized nations. The S&P 500 has continued to notch fresh record highs in 2026, fueled largely by strong earnings from so-called megacap AI-related companies (4).

Despite these gains, Galloway and others argue the market may be more fragile than it appears.

The China Threat and Concentration Risk

On the podcast, host Steven Bartlett posed a hypothetical: "If you're China, as a leader now, you go, you know what? Give Americans cheap AI, and you'll kneecap their economy."

"One hundred percent. That's what I would do," Galloway agreed. "Founders get quite scared that there will be an economic crash in the next 12 or 24 months because of overinvestment in AI."

Although Galloway's warning has not yet materialized, he has continued to argue that investors should pay attention to concentration risk and the possibility that AI-related valuations may not match future returns. The core concern is that Americans are heavily invested in AI with few alternatives to protect them from a potential recession. The growth of passive investing, where index funds automatically allocate capital based on market weight, has amplified this exposure: many retirement savers hold AI-heavy megacap positions without actively choosing them.

This raises a critical question: if 40% of big tech stocks were to crash, would a traditional 60/40 portfolio allocation — 60% equities and 40% bonds, the bedrock of retail retirement planning for decades — still be appropriate for the current economy?

Why the Market May Be More Fragile Than It Looks

The original appeal of the S&P 500 index was diversification — owning a small piece of many different companies. In a world where an increasing share of top-weighted companies are betting heavily on AI, that resiliency is in question.

Today, the index is heavily concentrated in megacap technology firms like NVIDIA (NASDAQ: NVDA), Microsoft (NASDAQ: MSFT), Amazon (NASDAQ: AMZN), and Alphabet (NASDAQ: GOOG) — many of which are investing aggressively in AI infrastructure. Other major companies, including Apple (NASDAQ: AAPL), Meta Platforms (NASDAQ: META), and Broadcom (NASDAQ: AVGO), have similarly become increasingly tied to the AI investment boom.

According to data from Visual Capitalist, the top 10 companies in the S&P 500 now account for roughly 36% of the index's total weight (5), among the highest concentration levels in the benchmark's history.

Many of these companies have also invested in one another — a practice Bloomberg describes as "circular deals," where capital rotates among companies at the top of the index (6). Parallels have been drawn to the dot-com era, when telecom companies invested heavily in one another, creating a web of dependencies that unwound dramatically — the Nasdaq Composite lost roughly 78% of its value from its March 2000 peak to its October 2002 trough.

Not everyone views the situation as bleak. An analysis by J.P. Morgan Asset Management notes that these deals are driven by "free cash flow and robust margins" from the hyperscalers themselves (7). The firm argues this differs from past bubbles, where "tightening credit conditions" precipitated the collapse.

Galloway, however, maintains that the overrepresentation of AI at the top of the market creates vulnerability for ordinary investors, particularly those relying almost entirely on index funds for retirement savings.

"Either these companies' valuations need to be cut by 50 or 70%, or you need a massive destruction in the labor market," he said on the podcast.

The capital flowing into AI must eventually produce real economic returns — either through explosive revenue growth or massive cost-cutting efficiencies. While enthusiasm for AI has helped push markets higher, the payoff may take longer than investors expect. What bears watching in the quarters ahead is whether AI-related revenue begins to scale in proportion to the hundreds of billions being deployed, or whether margins compress as competition — including from lower-cost Chinese providers — intensifies.

Investors Turning to Alternative Assets

One reason some Americans are beginning to look beyond traditional stock-and-bond portfolios is the growing interest in alternative assets (8).

Gold, in particular, has surged to record highs in 2026 (9), with central banks making significant purchases in the second quarter of the year (10). Although the precious metal has pulled back from some recent highs, gold remains "broadly in line" with global market conditions, according to the World Gold Council's mid-year outlook (11), citing moderate growth, elevated inflation, and central bank tightening.

Real estate continues to attract investor attention as well, accounting for nearly 25% of the typical family office portfolio. Post-war and contemporary art has also seen a record number of sales, according to the 2025 Artprice Report on the Contemporary and Ultra-Contemporary Art Market (12).

Sources: @TheDiaryOfACE/ YouTube (1); Federal Reserve Bank of St. Louis (2); Goldman Sachs (3); NBC (4); Visual Capitalist (5); Bloomberg (6); JPMorgan Chase (7); Reuters (8); BBC (9); World Gold Council (10, 11); Artprice (12)

This article provides information only and should not be construed as investment advice.