Economist Scott Galloway has warned that heavy AI exposure across the S&P 500 leaves the index vulnerable to a sharp downturn within the next 12 or 24 months. He points to Federal Reserve and Goldman Sachs data showing how much of recent growth already rests on AI spending, alongside rising concentration among the index's largest technology companies.
Scott Galloway has warned that with about 40% of the S&P 500 tied to AI-focused businesses, investors may need to reevaluate their risk exposure or prepare for a portfolio wipeout. Speaking on The Diary of a CEO podcast, Galloway said: "There's no way they can justify these incredible valuations". He also pointed to cheaper Chinese AI alternatives as one of the biggest threats facing American AI companies.
AI's outsized role in growth
Galloway argued that the majority of GDP growth over the last two years has come from AI, and that a slowdown in that spending would push the U.S. into recession immediately. Data from the Federal Reserve Bank of St. Louis supports the pattern: the Fed found that 39% of total GDP gains in the third quarter of 2025 were driven by AI-related growth in software, R&D, information processing technology and data center construction.
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. 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.
A narrower index than it looks
The top 10 companies in the S&P 500 now account for roughly 36% of the index's total weight, according to data from Visual Capitalist. Nvidia, Microsoft, Amazon, Alphabet, Apple, Meta and Broadcom have all become increasingly tied to AI infrastructure spending, adding to concerns about how concentrated the index has become.
Bloomberg has described a pattern of circular deals among these companies, in which capital rotates among the largest firms as they invest in one another — a dynamic that echoes how telecom companies invested heavily in each other during the dot-com bubble. J.P. Morgan Asset Management has pushed back on the comparison, however, noting that today's deals are funded by the hyperscalers' own cash flow and margins, unlike past bubbles where tightening credit conditions were the trigger that ended them.
Galloway's bottom line
Galloway argues that AI's dominance at the top of the market creates risk for ordinary investors who rely on index funds for retirement savings. He said current valuations would need to be cut by 50% or 70%, or the labor market would need to suffer massive destruction.
Podcast host Steven Bartlett suggested China could kneecap the U.S. economy by offering cheap AI to undercut American firms, and Galloway agreed. Galloway added that founders get quite scared of an economic crash within the next 12 or 24 months due to AI overinvestment.
Source: Moneywise
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