Like it or not, AI is here to stay. In one capacity or another. That is not the debate here. What I am more interesting in talking about is that impact that AI is having on the stock market and what it means for us investors. One could argue, and many have, that AI is artificially propping up the current market. And that has all the makings of a potential AI bubble.

The question is, if an AI bubble is truly building and heading towards a loud *pop*, what should we be doing about it?

Evidence that an AI bubble is coming (or already here)

In 2025, an astounding 80% of gains seen in US stocks comes from AI companies. Some napkin math will illustrate that AI accounts for roughly 9.6% of the 12.29% year to date gains on the S&P 500. This is almost unfathomable. Adding more fuel to the fire, 40% of US GDP growth this year is due to AI companies.

In any circumstance, this would be some cause for concern. Over concentration of the market in any one particular sector of the economy is an issue that the overall economy may not be at risk. The same way over concentration of one's investment portfolio can be dangerous.

But in today's economy, we have even more reason to worry about the market as a whole. These include:

• Inflation that doesn't seem to want to go away
• Tariffs
• Rising debt
• Plummeting immigration and a tightening labor force

Even amidst a government shutdown, the response from the stock market was a resounding “who cares?” as the S&P reached on new high in early October 2025. Furloughed workers and a halt in government run business usually does not signal that the economy is bolstering. But, in this case, investors continued to feel bullish and AI hype is likely a big part of that.

And I will quickly note that this does seem to be a uniquely US market issue. European markets are outperforming US markets. However, foreign investors continue to invest huge sums of money into AI in the US market. The result: the US market much more concentrated than their markets are.

When will the AI bubble pop?

There are a couple of things that can happen from this point on.

In one scenario, AI truly proves to be a savior. Its uses and applications abound, resulting in an economic boom. The expectation is this will largely come from increasing productivity growth. Higher productivity per worker means higher GDP which means lower national debt:GDP ratio. So you can see how come view AI as a cure-all for any economic maladies.

In another scenario, AI busts. But this could happen two ways. First, AI could prove to be utterly useless…good only for developing pictures of people with 6 fingers. It eventually falls by the wayside. Personally, I don't think this will happen. However, a bust could come from a more boring, and more likely, event. That AI proves to be useful and have important applications, but just not enough to create the kind of economic boom the stock market is betting on.

It is still as true as ever that no one has a crystal ball when it comes to the stock market. But simple probability tells us that the “bust” scenario is twice as likely as the “boom” scenario.

Personally, I think the most likely scenario is one in which a minor pop occurs as AI expectations level out over time. Right now, AI has some interesting applications. But I am not sure it will meet any of our imaginations' expectations. But then again, I don't have a crystal ball either.

What should you do?

Most articles examining this topic end right about here. There is doom and gloom or unrestrained optimism. But nothing practical to help guide us investors.

There are 2 good reasons that this is the case:

• Fear/excitement are what generate clicks, and
• They don't have any useful tips for investors because they don't know what is going to happen either

So, this is where I remind you that no one in the history of the stock market has been shown to predict winners and losers or be able to time the market at a rate better than that expected by pure chance.

With this in mind, you really only have one rational response to this potential AI bubble left: keep on investing in the overall market.

By investing in the overall market via low cost, broadly diversified index funds, you benefit from the included AI stocks while they are high and, if they bust, you hold all of the other stocks that can win as a result. Even if the short term results in a hit to the entire stock market, it will recover as it always has. But if you only held AI stocks, you would be out of luck when that happens.

Some nuanced hedges

However, there are some hedges you can play that all have 1 thing in common: reducing your exposure to the US stock market.

You can do this by investing in international stock index funds (to take advantage of other markets out performing the US in non-AI sectors) and bonds (remember, there have been periods when bonds outperformed stocks).

This should all be tailored to your personal written financial plan and your risk tolerance, but this guide for bonds and this guide for international stocks can guide you to the appropriate allocation.

In very simple terms

There is a good deal of evidence and reasonable consideration that we may be headed for an AI bubble that could burst in the future. The US in particular appears to be placing a huge bet on AI to boost its economy.

But the bottom line is that no one knows if and when this will happen. So what are we supposed to do with all of this information?

It would be easy to panic and sell AI holdings. Or to read some hype and buy even more. But that is certainly not the answer.

Instead, use this as a time to evaluate your overall equity asset allocation

Ask yourself, if there was an AI bust, would your nest egg and ability to retire on your terms be significantly impacted?

If so, some adjustments are likely necessary. If you hold individual AI stocks, make a call on your ability to tolerate their evaporation. Or if you are over-concentrated in US stock index funds, consider re-allocating to bond and/or international stock index funds.

And if your response to this question is a shrug of the shoulders, like mine, then you are right where you need to be. And that is a great feeling, and the ultimate power of having a personal written financial and investing plan!

What do you think? Are we headed for an AI bubble in the stock market? Why or why not? How would your nest egg respond to a busting bubble? Let me know in the comments below!