In 2025 the S&P 500 ended the year up approximately 17%, making it the third straight year of double-digit gains.1 This bull market has been powered by the stocks closely associated with artificial intelligence theme. Yet beneath the surface, this rally is anything but broad-based.
AI hype has funneled capital into a narrow cohort of beneficiaries, leaving the majority of the sectors behind. The so-called Magnificent 7 stocks (Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla) contributed approximately 45% of S&P 500’s total return. In short, the rally’s “strength” is propped up by mega-caps; peel back the layers and find that the median stock is up close to 6%.2
Defenders of this concentration argue that it is earned given the Magnificent 7’s strong balance sheets, higher profitability, and earnings. Skeptics, on the other hand, argue that their high PE embeds optimistic assumptions about AI’s payoff, and any shortfall in earnings could trigger a market correction given how popular this theme is.
Is AI Making a Workplace Impact?
The initial hype around AI is maturing into a period of profound pragmatism. The fundamental question has shifted: we are no longer just marveling at its capabilities but asking what its earning potential is. This transition is a healthy one, moving us away from the hope-and-hype cycles of the past and toward a market defined by real-world utility.
According to a recent paper, close to 36% of US workers are using Generative AI tools to some capacity in their occupation.3 However, the use and application of ChatGPT and other Generative AI tools in workplaces varies significantly by industry and demographic. A Gallup poll from June showed that while around 40% of US workers claim to use AI at least a few times a year, only 8% of those surveyed were using it daily.4
There hasn’t been much evidence yet that AI is resulting in large productivity gains, as the data is hard to quantify. One report from Goldman Sachs indicated that AI boosts labor productivity by 27-31% on average, but we wouldn’t put too much stock into this number as the sample size was small and included company anecdotes, which are likely upwardly biased.5
Although limited, the data looking at the impact of AI on youth employment clearly suggests a disproportionate effect. Recent analysis shows that hiring for entry-level roles (ages 22-25) for AI-exposed roles has declined 16% compared to roles that are less exposed to AI.6 This effect appears to be isolated, as the study showed that older workers were insignificantly impacted.7
In sum, while generative AI has achieved meaningful penetration across the U.S. workforce, its adoption remains uneven and its productivity benefits difficult to measure at scale. As AI capabilities continue to evolve, the data suggests that its influence on work will be gradual, underscoring the need for continued monitoring, adaptation, and targeted workforce development.
AI and Equities: A Bubble or Not?
The central question for 2026 is whether the massive capital investments made over the last several years can finally translate into sustained corporate earnings. Investors argue whether this is the beginning of a multi-decade productivity revolution or is it a high-stakes financial bubble nearing its peak. Let’s take a look at the core arguments from market participants on both sides of the AI bubble debate.
Why AI is a bubble?
The Capex vs. Revenue gap: There is a widening disconnect between the large amount that is being spent on chips and data centers and the revenue being generated by AI software. Critics worry that ROI will never materialize to justify the investment.
Circular Financing: There is a growing concern regarding circular deals within the AI industry, where the major players invest in their own customers and suppliers. Skeptics warn that this could create an artificial house of cards where reported revenues are inflated by companies essentially passing the same capital back and forth rather than generating it from outside demand.
Scaling Laws: There has been a suggestion that the idea that returns for more data and computing are diminishing. If models stop getting significantly smarter, the case for greater capital spend begins to fall apart.
Leverage: Most of the market value is concentrated in a few companies that have strong balance sheets. But there are companies that are taking on significant debt to buy GPUs, creating pockets of risk if the hype cools.
Why AI is not a bubble?
Financial Strength: AI leaders are high margin companies that generate large amounts of free cash flow and are making investments with existing profits rather than debt, making them more resilient to market shocks.
Real World Utility: There is measurable efficiency in software development, legal document review, and high-volume customer service. Many AI companies are generating revenues from enterprise-grade customers.
Reasonable Valuations: Valuations are high but nowhere near the extremes of 1999 and much of the growth has been supported by earnings growth.
Where do we stand in this debate?
While we think that the AI sector is not a bubble yet, we acknowledge that there are signs of froth in certain pockets. We like the theme and believe in its potential to enhance productivity but recommend diversifying across the various layers of the AI stack (infrastructure, platforms, and applications).
Lido Advisors, LLC is an SEC-registered investment adviser. Please note that SEC registration does not denote any particular competence or ability and no inference to the contrary should be made. For complete information on the services we provide and our fees, please review our Form ADV at adviserinfo.sec.gov, call 800-301-LIDO, or mail us at 1875 Century Park East Suite 950, Los Angeles, CA 90067.
The information contained herein reflects Lido’s views as of the date of this newsletter. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. Lido has obtained the information provided herein from various third-party sources believed to be reliable but such information is not guaranteed. Any forward-looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Lido is not responsible for the consequences of any decisions or actions taken as a result of information provided in this newsletter and does not warrant or guarantee the accuracy or completeness of this information.
Past performance is not indicative of future performance. The information in this report is for informational purposes only and should not be relied upon as the basis of an investment or liquidation decision. Nothing in this report shall be construed to be a solicitation to buy or offer to sell any security, product or service to any non-U.S. investor, nor shall any such security, product or service be solicited, offered or sold in any jurisdiction where such activity would be contrary to the securities laws or other local laws and regulations or would subject Lido to any registration requirement within such jurisdiction. All content herein has been obtained from sources deemed to be reliable, but is subject to unintentional errors, omissions and changes without notice, and is not warranted as to its accuracy or completeness. You should not rely on the information contained herein, and should rely solely on, and carefully read, the appropriate offering and related subscription materials relating to any specific investment product before making any investment decision.
Not all investments are suitable for all clients. It should not be assumed that any security listed or any recommendations made in the future will be profitable or without loss, including risk of loss of principal, or will equal any prior performance. All investments involve the risk of potential investment losses including the potential risk of loss of principal as well as the potential for investment gain. Further, the prior performance figures indicated herein represent portfolio performance for only a short time period and may not be indicative of the returns or volatility each portfolio will generate over a long time period. The performance of the portfolios should also be viewed in the context of the broad market and general economic conditions prevailing during the periods covered by the performance information. Any references to future returns/risk are not promises of the actual return the client portfolio may achieve. Before investing, investors should seek financial advice regarding the appropriateness of investing in any securities of investment strategies discussed. Not all investments are suitable for all investors.
The information herein is not legal, such as trust or estate planning, advice, or tax advice. Any such information is provided for illustrative purposes only and must not be relied upon without the benefit of the advice of your lawyer and/or tax professional. Lido specifically disclaims any liability from any reliance on such information. Lido is not a legal service provider or tax professional and does not offer legal or tax advice. Should you desire to obtain tax or legal services or advice, you must enter into your own, independent engagement agreement with a licensed attorney or tax professional.
Lido specifically disclaims any and all liability arising from the information or illustrations presented in these materials and is not responsible for the consequences of any decisions or actions taken as a result.
Lido Advisors, LLC is an SEC-registered investment adviser. Please note that SEC registration does not denote any particular competence or ability and no inference to the contrary should be made. For complete information on the services we provide and our fees, please review our Form ADV at adviserinfo.sec.gov, call 800-301-LIDO, or mail us at 1875 Century Park East Suite 950, Los Angeles, CA 90067.
The information contained herein reflects Lido’s views as of the date of this newsletter. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. Lido has obtained the information provided herein from various third-party sources believed to be reliable but such information is not guaranteed. Any forward-looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Lido is not responsible for the consequences of any decisions or actions taken as a result of information provided in this newsletter and does not warrant or guarantee the accuracy or completeness of this information.
Past performance is not indicative of future performance. The information in this report is for informational purposes only and should not be relied upon as the basis of an investment or liquidation decision. Nothing in this report shall be construed to be a solicitation to buy or offer to sell any security, product or service to any non-U.S. investor, nor shall any such security, product or service be solicited, offered or sold in any jurisdiction where such activity would be contrary to the securities laws or other local laws and regulations or would subject Lido to any registration requirement within such jurisdiction. All content herein has been obtained from sources deemed to be reliable, but is subject to unintentional errors, omissions and changes without notice, and is not warranted as to its accuracy or completeness. You should not rely on the information contained herein, and should rely solely on, and carefully read, the appropriate offering and related subscription materials relating to any specific investment product before making any investment decision.
Not all investments are suitable for all clients. It should not be assumed that any security listed or any recommendations made in the future will be profitable or without loss, including risk of loss of principal, or will equal any prior performance. All investments involve the risk of potential investment losses including the potential risk of loss of principal as well as the potential for investment gain. Further, the prior performance figures indicated herein represent portfolio performance for only a short time period and may not be indicative of the returns or volatility each portfolio will generate over a long time period. The performance of the portfolios should also be viewed in the context of the broad market and general economic conditions prevailing during the periods covered by the performance information. Any references to future returns/risk are not promises of the actual return the client portfolio may achieve. Before investing, investors should seek financial advice regarding the appropriateness of investing in any securities of investment strategies discussed. Not all investments are suitable for all investors.
The information herein is not legal, such as trust or estate planning, advice, or tax advice. Any such information is provided for illustrative purposes only and must not be relied upon without the benefit of the advice of your lawyer and/or tax professional. Lido specifically disclaims any liability from any reliance on such information. Lido is not a legal service provider or tax professional and does not offer legal or tax advice. Should you desire to obtain tax or legal services or advice, you must enter into your own, independent engagement agreement with a licensed attorney or tax professional.
Lido specifically disclaims any and all liability arising from the information or illustrations presented in these materials and is not responsible for the consequences of any decisions or actions taken as a result.
