AI is everywhere, leaving investors exposed if the technology doesn't pan out as expected

AI has permeated Wall Street, creating risk for investors.

You didn't believe it, did you? You didn't trust the financial adviser, the 401(k) materials, the fund managers, and analysts, right? You didn't nod your head and think, "That sounds smart," when they told you diversification is a sound strategy? Really? Target-date funds?

How has that worked out?

Today we all basically have one bet: AI. That's it. It's more than just the "Magnificent Seven." The so-called diversified index funds are crammed with AI. Bond buyers are sitting on AI risk. Mortgage borrowers are sitting on it. Nothing is safe.

See also: The hottest part of the AI trade could be turning into its biggest weakness

Now, with AI doomageddon a full-fledged panic, our bet just became a serious threat. If AI doesn't pan out or become profitable, or if people don't start paying for it, we'll have a lot of chips with which to measure our food rations.

So, where are we and how did we get here? Who did this? And what should we do?

From wild claims to fees

First, the AI industry - Anthropic, Alphabet's Google (GOOG) (GOOGL), Meta Platforms (META), OpenAI and others - started this frenzy with wild promises. Leaders talked about massive economic benefits: efficiencies, products and a remade labor market that sounded terrible to workers but great to business leaders looking to slash expenses. McKinsey & Co. said AI would add up to $4.4 trillion to the global economy. AI founders said it would be bigger and faster than the industrial revolution.

For a product that could kill us before it learns to tell time, that's quite a marketing choice.

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But the hype got the attention of Wall Street and every business leader who didn't want to be seen like they were running a pager company in 1999. CEOs didn't want to look dumb, and Wall Street saw an opportunity: massive financing and fees from the AI build-out (data centers, computing power) and eventually IPOs.

So, Wall Street went to work: More than $800 billion has been borrowed since the start of 2025, according to Goldman Sachs. Nearly $1 trillion in lease agreements for data, according to Moody's. An IPO for SpaceX has the company valued at $2 trillion as of this writing. Combined, that produced record fees (Goldman reported $28 billion in capital-markets revenue this year alone).

To land the listing, Nasdaq rewrote its rules so SpaceX (SPCX) could enter the Nasdaq-100 just 15 trading days after its debut, instead of waiting at least three months; and FTSE Russell followed. That made every index fund tracking them a forced buyer; S&P Dow Jones Indices, which kept its profitability and seasoning requirements, proved this didn't have to happen.

That's just the start. Spending on AI data centers alone is expected to land between $3 trillion and $5 trillion over the next three to five years. Meanwhile, OpenAI continues to bleed money (reportedly posting $12.3 billion in losses in the latest quarter), and Anthropic likes to say it's profitable - except for the money it spends building its next product.

Said another way: Fitch modeled a scenario with a 35% drop in AI stocks over six months. The result would be a U.S. recession and global stagnation. GDP would contract as much as 1.5% in the second quarter of 2027, private-capital spending would fall more than 6%, and global growth would drop below 1% in 2027.

Diversification is a two-player game

In Fitch's scenario, you can imagine that inflation might recede, or that Treasurys might be a haven. Maybe. But we've had war-driven energy inflation before. We've never had it with $40 trillion in debt. Most sane people believe that needs to be addressed. Governments usually escape big debts through growth or inflation. A recession delivers neither, so this time Treasurys may not be the refuge they once were.

That leaves diversified investors (and everyone else) without options.

It's not a great place to be, and it's not all our fault. We've been told by great investors that diversification is a smart strategy. As John Bogle said, "Don't look for the needle in the haystack. Just buy the haystack." So, we bought his index funds that promised just that.

From time to time, Wall Street starts jamming too much of a "good thing," like AI, into the market. And you can't keep your eggs safe with only one place to put them. Wall Street, the industry and policymakers are giving us an AI basket. They get fees, huge IPO payouts and more power, respectively. We get the bag.

Maybe it all pays off, and we get universal basic income while AI bots bring us mai tais on the beach. Or it could be something in the middle: a little disruption with some winners and losers balancing returns. Or it could be the Fitch scenario, and we can forget about the basket because we'll be in the same boat.

-David Weidner