AI Valuation Assumptions are Extraordinary - Is Your Portfolio Prepared?

To justify current AI valuations: Tech companies collectively need to deliver approximately $5 trillion in productivity gains, primarily through labor cost reductions. Wall Street's lofty AI market caps essentially represent the market pricing in massive future profit increases from replacing human workers. For these valuations to make mathematical sense, AI must successfully automate away roughly $5T in labor costs across the US economy.

If AI successfully delivers these workforce reductions, it will devastate consumer spending power and trigger economic contraction. The very success that would justify sky-high tech valuations would simultaneously undermine the broader economy those companies depend on. This economic contraction would likely trigger a market collapse despite AI stocks initially appearing to succeed.

If AI valuations prove unrealistic: Should AI fail to deliver the massive productivity and profit gains already priced in, the current tech-fueled market rally would rapidly unwind as reality fails to meet inflated expectations, leading to significant dot.com bust type corrections throughout markets.

Either way, the prospect of a very large downside is ever present. 

Some thoughts on 2026's AI-driven market scenarios:

If AI technologies fail to deliver on lofty expectations, markets could experience a sharp correction similar to the dot-com bubble burst. In this environment:

• Think back to March 2020's market crash. Look for VIX-based downside protection to "flip the sigh" on market returns.

AI Success/Economic Recession Scenario: If AI successfully delivers $5T in productivity gains but triggers broader economic contraction:

• In this slow-declining market environment, look to limit downside participation compared to full market exposure.

Continued AI-Led Bull Market Scenario: Should the market continue its upward trajectory despite concerns:

• Keep invested but anticipate bumps and volatility. Exposure is key but allow for some downside protection on the dips.