Has AI Made S&P 500 Index Funds Too Dangerous to Touch?

Investing in the S&P 500 index is one of the more popular investment strategies.

Average investors often turn to S&P 500 ETFs such as the SPDR S&P 500 ETF Trust (NYSEMKT: SPY) or the Vanguard S&P 500 ETF (NYSEMKT: VOO), and for good reason. It provides a safe level of exposure to 500 companies, allowing investors to profit while staying diversified without needing to research individual stocks.

However, the artificial intelligence (AI) boom has arguably compromised that diversity. Here's what happened and what investors might need to do about it.

Image source: Getty Images.

Did the S&P 500 ETFs really become "AI stocks"?

Admittedly, calling an S&P 500 ETF an "AI stock" is an exaggeration. The index includes 500 companies, and while information technology is one of its major industries, it also covers financial services, healthcare, consumer staples, industrials, and other sectors.

Unfortunately, many investors wrongly assume that the S&P 500 is a 0.2% position in 500 different companies. Instead, individual stock performance drives the weightings, and AI stocks have grown in influence.

Nvidia, the largest S&P 500 company, accounts for 8.4% of the index on its own. The top 10 tickers (nine companies, since Alphabet has two tickers) in the S&P 500 make up 38.1% of the index, and all are tied to the AI industry. Definitions of "AI stocks" vary, but the exposure could approach 50% depending on how one defines the term.

Data source: State Street, SPDR S&P 500 ETF Prospectus as of Sept. 4, 2026.

Also, a subsidiary of S&P Global administers the S&P 500, and 38% of the index is stocks it classifies as "information technology," most of which are AI. The second-largest category, financials, makes up just 12.3% of the index.

Here is why this is a problem. Long-time investors may remember that the Nasdaq Composite lost up to 78% of its value in the dot-com bust. Although the index went on to recover and prosper, the Nasdaq took 15 years to reclaim its 2000 high.

The S&P 500 is not as tech-heavy as the Nasdaq, which probably means a recovery would take less than 15 years. Still, investors may have to wait years for the index to return to its all-time high in a worst-case scenario.

Putting the S&P 500 into perspective

Fortunately, most investors have less to worry about in this situation. The internet remains a key driver of the tech economy and stock portfolios decades after the dot-com bust, and likewise, an AI bust in the stock market is unlikely to wipe out that technology.

Additionally, over the last 100 years, the S&P 500's average annual return is approximately 10.5%. That time frame includes many downturns, including the Great Depression, the stagflation and economic malaise of the 1970s, the dot-com bust, and the 2008 financial crisis. Therefore, anyone who is more than 10 years from retirement could probably ride out the downturn and benefit from investing new money at lower prices for a time.

However, investors need to assess their risk tolerances. Not everyone in the market is comfortable with such volatility. Moreover, investors nearing retirement might have to delay that event if their S&P 500 index funds experience a massive drop.

The near-term danger is real. The Shiller CAPE ratio has now reached 42, just below its peak at the end of the dot-com boom. This does not mean that what some call the "AI bubble" is about to pop. Still, significant pullbacks have historically followed such peaks, implying that some investors could face an uncomfortable level of risk by being heavily exposed to the S&P 500 right now.

Is the S&P 500 too dangerous to touch?

For most investors, particularly those decades from retirement, the S&P 500 should remain a sound investment. The index has a 100-year track record of safe, reliable returns. For younger investors, a lower-priced S&P 500 is actually an opportunity to invest new money at lower prices, which should actually increase total returns after the likely recovery.

The problem comes for those looking to retire in the foreseeable future. Although an AI bust is not guaranteed, some investors may need to delay their departure from the workforce if such an event occurs.

Fortunately, investors who understand this potential danger can weigh their options and turn to other investments with less or no AI exposure if they find those more suitable. Ultimately, the closer a person is to retirement, the more they should prioritize safety over returns and invest accordingly.

Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Broadcom, Meta Platforms, Micron Technology, Microsoft, Nvidia, S&P Global, Tesla, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.