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The top 10 stocks in the S&P 500 account for 40% of the index’s market cap. Since ChatGPT launched in November 2022, AI-related stocks have registered 75% of S&P 500 returns, 80% of earnings growth, and 90% of capital spending growth. Meanwhile, AI investments accounted for nearly 92% of the U.S. GDP growth this year. Without those AI investments, Harvard economist Jason Furman noted, growth would be flat. As Ruchir Sharma concluded in the Financial Times, “America is now one big bet on AI,” adding, “AI better deliver for the U.S., or its economy and markets will lose the one leg they are now standing on.” This concentration creates fragility, and how the end begins becomes more visible.

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Trillion-Dollar Question
Valuations for the Mag 10 — the original group of seven leading tech stocks, plus AMD, Broadcom, and Palantir — are high, but not yet at historic peaks. The 24-month forward P/E ratio of the Mag 10 is 35x. In 2000, at the height of the dot-com bubble, the top 10 stocks traded at 52x forward earnings. Implicit in these valuations, however, is an assumption that AI will help these companies cut costs, or grow revenues by $1 trillion in the next two years. I believe we’re either going to see a massive destruction in valuations, infecting all U.S. stocks and global markets. Or we’re going to see a massive destruction in employment across industries with the highest concentrations of white-collar workers. Both scenarios are ugly.

If Mag 10 valuations are cut in half, the S&P and global markets would decline by 20% and 10%, respectively. In the U.S., the immediate impact would be felt by the wealthiest 10%, who own 87% of the stocks. Those households won’t struggle to pay their bills, but they may be the tail of the whip on the economy, as wealthy households have the luxury of decreasing their spending dramatically, vs. middle-class households, who spend the majority of their income on basics. If the top 10%, who account for half the consumer spending in the U.S., hit the brakes, the nation gets whiplash. I estimate that if the wealthy see their portfolios drop by 20%, we could see a 2-3% decline in GDP. For context: From peak to trough, the Great Recession registered a 4.3% drop in GDP.

If the Mag 10 justify their valuations by delivering $1 trillion in cost-cutting (Latin for “layoffs”), the impact will hit white-collar workers first, but the contagion could spread.
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Dot-Com Vibes
The AI infrastructure build-out has accelerated recently with an estimated $1 trillion in new commitments. Some firms are making deals with money and assets that don’t yet exist. See: OpenAI promising Oracle $300 billion — money it doesn’t have — for infrastructure Oracle hasn’t built. In other cases, revenue comes from “circular financing,” where dollars rotate between firms, obscuring true market demand. See: Nvidia’s $100 billion investment in OpenAI, which OpenAI will use to buy … Nvidia chips. Circular financing deals were common toward the end of the dot-com bubble, when similar deals contributed to a crash that destroyed 77% of Nasdaq market value. If we are on the precipice of a bubble popping, Nvidia and OpenAI will likely be ground zero. But the fallout would be widespread, as an ecosystem that resembles an ouroboros lives and dies by a shared narrative.
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