Is the AI Boom Becoming a Threat to Future Investment Returns?

Investors can’t fail to have noticed that the story of the stock market in 2025 has been one of Big Tech dominance, especially regarding AI.

AI’s recent outperformance has prompted institutional decisionmakers to consider whether the risk to future investment returns from current elevated valuations means it’s time to allocate capital elsewhere.

Right now, AI-driven companies comprise around one-fourth of many public equity market portfolios, thanks mostly to the recent performance of the “Magnificent Seven” (Apple AAPL, Microsoft MSFT, Amazon.com AMZN, Meta Platforms META, Google GOOGL, Nvidia NVDA, and Tesla TSLA).  

As of Sept. 30, 2025, those seven companies have a 23.1% weighting in the Morningstar Developed Markets Index. That’s bigger than any other whole sector in that index, as the charts below show. And if we add in Broadcom AVGO—another company heavily exposed to the AI-driven tech hardware boom—those eight companies represent 25.0% of the global developed markets index.

So, with one-fourth of public equity market portfolios at stake in many cases, it’s no wonder that institutional decisionmakers are thinking through their next move carefully when it comes to AI. 

This perspective was expressed in Morningstar’s latest Voice of the Asset Owner study, where we found that 61% of global asset owners surveyed view the evolving gen AI landscape as material to their investment decisions. That figure rises to 71% if we include North American asset owners only. 

And for some, it’s not just concerns about allocation that feature prominently when it comes to AI—questions about sustainability loom large for many asset owners.  

So, with all this in mind, where does the AI boom go from here? And are there any areas of doubt for investors examining current high valuations?

For one thing, after seeing their Q3 results, it’s clear that the Magnificent Seven’s high capital expenditure (capex) on AI technology shows no sign of abating any time soon. In an article for Morningstar.com, prolific author Larry Swedroe notes that this could spell trouble for investors.

Citing Kai Wu’s paper, “Surviving the AI Capex Boom,” Swedroe highlights how the Magnificent Seven “are transitioning from asset-light business models to capital-intensive operations.”

Based on Wu’s research, Larry Swedroe notes several key concerns for investors.

Companies aggressively growing their balance sheets underperformed conservative peers by 8.4% annually from 1963 to 2025.

Current AI spending already exceeds the internet boom’s peak relative to GDP. When adjusted for the shorter useful life of AI chips versus physical infrastructure, AI spending surpasses even the railroad buildout of the 1860s-1870s.

These companies succeeded through asset-light models leveraging intangible assets, achieving 22.5% returns on invested capital. However, capital expenditures relative to revenues at these companies have almost quadrupled from 4% to 15% since 2012. Wu’s research shows asset-heavy firms have consistently underperformed asset-light ones, so this is a red flag for current investors. 

Debt levels are rising, with off-balance-sheet financing a particular concern. Depreciation charges could climb from $150 billion to $400 billion annually over five years, while useful life assumptions for assets purchased may be overly optimistic given rapid replacement cycles.

For example, railroad companies of the late 1800s suffered through multiple panics and bankruptcies before stabilizing decades later. Telecom stocks in the early 2000s crashed 92% after the dotcom bust and remain 60% below their peak over two decades later.

Clearly, Big Tech dominance has left institutional allocators with some big decisions to make regarding their public equity allocations—both with regard to potential overexposure to the tech sector itself, and the US market more generally.

Morningstar commentators have had plenty to say about diversification lately. Here are a few other notes from our experts that you may find useful.

• Are We Due for a Market Rotation? Enduring enthusiasm for AI has made factor rotations hard to sustain.
• Why 2025 Is the Year to Invest in International Stocks: Non-US stocks are outperforming this year, but there are now both tactical and strategic reasons to overweight buy international global equities today. 
• Singapore’s GIC Takes an Insider's Approach to AI Investing: “We are very valuation sensitive,” Eric Wilmes, GIC’s president of the Americas, told PitchBook recently.
• Investors First: Benchmarking the Modern Market: Private markets are growing and companies are staying private longer. A new Morningstar benchmark seeks to capture the full investment landscape.