Disclaimer: I am not a licensed investment advisor. Consult with an advisor, CPA, and other professionals before making investment decisions. The below is presented for informational and educational purposes only.
Some funny things have been happening in the stock market lately, not least of which is the continued run-up in stock prices despite Americans’ increasingly uneasy feelings about the economy. I expect the next few months could be volatile, which would only ratchet up the financial stress that many Americans are currently feeling.
It would be fair (and accurate!) to say that the stock market is not representative of the economy as a whole. After all, the stock market is based on buyer and seller expectations of the future — it does not necessarily represent a snapshot of the present. And, more importantly, corporate earnings often tell a much different story than household budgets, so it can feel trite at times to overly focus on the stock market when people are struggling to keep up with prices at the grocery store, for example.
But it’s not as accurate as it once was to say that the stock market only impacts the wealthy. To be sure, the upper echelon of the financial elite owns the vast majority of public shares of companies on the major stock exchanges — by one recent metric, while 62% of American adults own stock, the top 1% of households own 54% of public market shares, up from 40% in 2022. Participation in the stock market varies by income and wealth levels, for sure.
From Pensions to Portfolios
One major driver of this shift is the move from traditional pensions to defined-contribution plans. In past decades, employers offered defined-benefit pensions — guaranteed income for life. Today, those plans have largely disappeared from the private sector, replaced by 401(k)s and 403(b)s, where workers bear both the risks and the rewards of investment performance.
This transition has tied the long-term financial security of millions of Americans to the stock market. Over time, this has generally been positive — markets have rewarded patient investors — but it also exposes individuals to volatility and risks that many may not fully understand, including a particularly unique one today, which is the subject of this week’s article.
The Rise of Index Investing
Most retirement plans now rely on passive strategies such as index funds, ETFs, and target-date funds that track broad market indices. This “own-the-market” approach is simple, cost-effective, and historically successful. In fact, I believe that at least 90% of retail investors would be more successful if they simply purchased a total market index fund rather than trying to outperform by picking individual stocks.
But this simplicity hides a subtle complexity: market-weighted indices aren’t evenly distributed. In the S&P 500, for example, nearly 30% of the total value is concentrated in just five companies — Apple, Microsoft, Alphabet (Google), Amazon, and NVIDIA. So, when you think you’re buying “a slice of 500 companies,” you’re actually heavily weighted toward a few giants.
And right now, those giants share one thing in common: massive bets on artificial intelligence.
The AI Arms Race
AI is being described as the most transformative force of our time — and the companies at the top of the market are investing accordingly.
Google has poured roughly $75 billion into AI-related capital expenditures this year alone.
Microsoft plans to spend about $80 billion in 2025 on data centers and AI infrastructure.
Amazon has earmarked over $100 billion for AI and cloud investments through AWS.
Apple has pledged $500 billion in capital expenditures over four years, focusing heavily on AI and chip design.
Collectively, these spending figures amount to an “AI arms race,” where each firm feels it must outspend the others to avoid obsolescence. Alphabet/Google CEO Sundar Pichai said during a speech in Paris in February, “AI will be the most profound shift in our lifetimes,” and “The biggest risk could be missing out.” When that is the attitude, there is almost no amount of money these companies will be willing to spend in order to try to win the race.
When nearly half the S&P 500’s total market capitalization is now tied, directly or indirectly, to AI-related companies, investors — even passive ones — are more exposed to this single trend than they may realize.
Echoes of the Dot-Com Era
It’s hard to ignore the parallels with the late 1990s. Back then, the internet promised to revolutionize everything, and it did. But many investors got ahead of reality, pushing valuations beyond reason. When the bubble burst, it took years for even the survivors to recover, and many of those early Dot Com companies ceased to exist (Pets.com, anyone?).
AI may be following a similar script. The technology is real, transformative, and already reshaping industries. But valuations for AI-related companies have far outpaced earnings growth. It will take several years of exceptional profitability to justify current prices. That doesn’t mean we’re definitely in a bubble, but it does mean expectations are running hot.
The difference this time is that many AI leaders, unlike the dot-com startups of old, are profitable. NVIDIA, for instance, has grown annual revenue from $4 billion in 2023 to $73 billion so far in 2025. Still, even great companies can become overvalued when markets assume growth will last forever.
What It Means for Everyday Investors
If you have a 401(k), IRA, or index fund, you are likely (whether you realize it or not) participating in the AI boom. That’s not necessarily bad; innovation and long-term growth are the bedrock of markets. But it does mean you should be prepared for volatility. When a small group of stocks drives most of the market’s gains, the same dynamic can magnify losses when sentiment shifts.
The stock market has risen more than 20% in each of the last two years and another 15% in 2025, largely fueled by AI enthusiasm. History tells us that strong runs often end with corrections, not because innovation stops, but because expectations catch up with reality.
Whether or not we’re in an AI bubble, we are certainly in an AI era. Just as the internet transformed commerce, communication, and daily life, AI will transform how we work, invest, and live. The opportunity is enormous, but so is the need for balance and perspective.
For long-term investors, the lesson isn’t to abandon the market or shun AI stocks. It’s to stay diversified, stay patient, and stay aware of what you own. The future may indeed belong to AI, but markets will always belong to psychology — and understanding both will serve you far better than chasing the next big thing.
One Final Thought
It’s a little bit beyond the scope of today’s article, and this is a topic I might come back to in the near future, but there are some fascinating questions at play with the construction of data centers and other investments in hard AI infrastructure including hardware technology. When all is said and done, AI-related investment is not just swelling stock prices, but also contributing in a more than meaningful way to broader economic growth.
Harvard economist Jason Furman released his own analysis recently that investments in data centers and IT processing equipment accounted for almost all of GDP growth in the first half of 2025. Without this investment, GDP growth would have been just 0.1%. Construction expenses, the purchase of materials, and all the various hard and soft costs that go into these types of investments have been almost single-handedly fueling economic growth. Per Nick Lichtenberg of Yahoo Finance:
This surge in technology-led growth comes against a backdrop of wider economic sluggishness and paradoxically strong GDP growth. Job creation has slowed, raising concerns that, absent technology investment, the U.S. economy could have slipped into recession. Other sectors—from manufacturing and real estate to retail and services—contributed little or even detracted from overall output in the first half of 2025.
On that disconcerting note, we’ll see you next week for another edition of The Sunday Morning Post.
Ben Sprague lives and works in Bangor, Maine as a Senior V.P./Commercial Lending Officer for Damariscotta-based First National Bank. He previously worked as an investment advisor and graduated from Harvard University in 2006. Ben can be reached at ben.sprague@thefirst.com or bsprague1@gmail.com.
Outstanding analysis that highlights a critical blind spot for most index investors. The stat about 30% of S&P 500 value concentrated in just 5 companies is staggering, and when you overlay that with the AI capital expenditure arms race ($75B Google, $80B Microsoft, $100B Amazon, $500B Apple), it becomes clear we're all massively exposed to a single technological bet whether we realize it or not. Your comparison to the dot-com era is apt - the technlogy is real and transformative, but that doesn't prevent valuations from getting ahead of fundamentals. The Jason Furman analysis about AI infrastructure investment accounting for almost ALL GDP growth in H1 2025 is perhaps the most fascinating revelation - it shows how dependent our entire economic expansion has become on this single sector.