Part 2: Your Index Fund Is a Bet on AI — Whether You Know It or Not

In this episode of Motley Fool Hidden Gems Investing, Motley Fool contributor Rachel Warren sits down with Bethany McLean, veteran investigative journalist and co-author of The Smartest Guys in the Room, to continue their discussion. McLean turns the lens to the market right now, talking about:

• Why the free cash flow of the Magnificent Seven is quietly turning negative
• Why the circular financing inside the AI ecosystem makes it nearly impossible to see what's really going on,
• Why the S&P 500 index fund you think is keeping you diversified is actually one of the most concentrated AI bets you can make.

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A full transcript is below.

This podcast was recorded on Aug. 2, 2026.

Bethany McLean: Your index fund isn't your index fund anymore, meaning that the S&P 500 index funds are heavily weighted toward the hyperscaler, so your index fund is a bit on the AI economy. If you think that your index fund is still helping you profit from a broad swath of the market, it's not.

Rachel Warren: That was Bethany McLean, veteran investigative journalist and co-author of The Smartest Guys in the Room. I'm Motley Fool analyst Rachel Warren. Last week, Bethany and I talked through the psychology of corporate fraud, the red flags investors miss, and what really separates a visionary CEO from a fraudster. This week, in part 2, we turn the lens on the market right now, the AI trade, what's happening to the free cash flow of the biggest companies in the world, and why the investment you think is keeping you safe may not be doing what you think it is. We hope you enjoy.

Your book, The Big Fail, talked about what the pandemic revealed about who America's financial systems tend to protect. I'd like to talk about this from a market perspective. How did factors like government bailouts, Fed interventions break that natural market cycle of creative destruction, and what we see now?

Bethany McLean: Yeah. I think it's a really important issue for today because it's one that Kevin Warsh, the new Fed Chair, is going to have to contend with. There's much discussed as this issue of political independence, the Fed being independent from politicians. Less discussed is the issue of financial dependence, the Fed being independent from Wall Street. The reality is, is that the Fed did not intend it this way, but over the past couple of decades, going back to maybe even earlier, the bailout of this big hedge fund called Long-Term Capital Management, the Fed has been more and more a captive of Wall Street in that the Fed is afraid to let the market break. The pandemic, you can argue, that's exactly what the Fed needed to do because the market was breaking.

But nonetheless, it provided reassurance to Wall Street that when the proverbial whatever hits the fan, the Fed will always step in. That belief and a backstop is what people call moral hazard, and I think that it is not great, and I think it is a big risk for our financial system because every time the Fed pushes the boundaries of what it can do and pushes them further and further and further. The question is, how much further can they be pushed because the bailouts keep getting bigger in size? I think that's a real risk, and the problem with that policy is that it does benefit the big and the well off, not the small and the less well off.

Fed policy really benefited big corporations that needed access to the debt market in the pandemic. It benefited well-off individuals because the stock market soared, obviously in the wake of the Fed's actions. People who had exposure to the stock market did really well. It didn’t benefit small companies who didn't have access to the capital markets, not at all. The government obviously tried to come up with a lending plan for them that was much better than nothing. But it doesn't benefit small companies, and then it allows the big to consolidate, which makes life even more hard on the small. This action really didn't benefit consumers or citizens who are less well off, who don't have exposure to the market, because it helped cause inflation. The debate of how much Fed policy contributed to the inflation we experienced and are still experiencing is a raging debate, but it definitely didn't help matters. Inflation hurts people at the lower end of the income spectrum a lot, while the gains and asset prices don't do much to help them.

Rachel Warren: We live in an era of a lot of hype in the markets. Here at The Motley Fool, obviously, we talk a lot about the quality of businesses to invest in, but certainly it's also a time of, we've seen meme stocks, retail options trading, financial influencers. I'm curious to hear your thoughts on how the democratization of market data mixed with Internet hype has really changed the speed at which corporate narratives inflating and collapse and really the ways to determine the hype from the value in that environment.

Bethany McLean: That's funny. It's just something I'm thinking about now, especially with the IPO of SpaceX and the possible coming big IPOs of OpenAI and Anthropic because this retailization of the market is a really interesting phenomenon. I think one thing that concerns me, although it is true of professional investors as well that I just wrote a piece for the New York Times on SpaceX, and I used my favorite F. Scott Fitzgerald quote, which I'm going to mangle as I try to paraphrase it, that the true mark of genius is being able to hold two competing notions in your mind at the same time and not go crazy. It is something that people are less and less capable of doing. If you're going to be a really good investor, you should be able to hold one thought in your mind, which is that, say, SpaceX might be this, it might rule the world. But you should be able to hold the other thought in your mind, too, which is that this company has a ton of debt and needs a ton of debt, and there's a lot of danger here.

People are just increasingly vehement and monomaniacal about one side of the equation, and that's not being a good investor. People don't, if a short seller says, oh, that idiot, their bias. Instead of, wait, what does this person say? Does it make sense? Should should I think about this? You should think about the reality is you think about everything. Think about every piece of information if only then to say, I understand this point of view, but I don't agree with it. But you should have intellectually grounded means of dismissing points of view that you don't like, not just a reactionary one. I worry about the reactionary tendency in the market. By the way, I see it from professional investors, too. Nobody likes to be told that something that they believe in may not be worthy of a belief.

Rachel Warren: When you wrote The Smartest Guys in the Room, information moved much slower than it does now. Today, a short report or other news can go viral in minutes. It can wipe out billions in market cap. I'm curious, does this hyper speed environment, do you think it makes markets more efficient at finding truth or just more chaotic? I think that's a question that weighs on a lot of investors' minds these days.

Bethany McLean: I think it makes it more chaotic. I don't think it necessarily makes it more efficient because there's just this reaction, and it can be totally outsized, and it doesn't do a lot to sort out what truth is. But the market has never really been efficient in that way that people think. I think about there's Enron, for instance, the skepticism was out there. A lot of big smart hedge funds were short Enron for years before it's collapsed. Of course, they weren't putting out there. There wasn't a vehicle in which they could disseminate their point of view, but they were right. Nonetheless, it took years for Enron to collapse.

A more compelling recent example is Wirecard, this big European company that ended up going bankrupt and was a total scam. There was a really convincing piece in the FT, maybe a decade, seven years or so before Wirecard was revealed to be a fraud that laid it all out, and no one cared until they did. There's also this tendency to dismiss red flags because the market isn't incorporating those red flags into its view of the price. Therefore, the red flags must be wrong.

If you look at history, you see that's just not correct. You can't dismiss a red flag because the market doesn't seem to care. You may decide that you believe, and so therefore, you're going to keep the red flag in your back pocket, but continue to invest, or you may decide that the red flag isn't really a red flag and that you think the person who raised it is wrong, but you still need to pay attention.

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Rachel Warren: Well, one of the things that's interesting: We are living in a time of a lot of information that's constantly coming towards investors in the AI revolution and the AI build-out. Now, obviously, there are particularly the big companies, they are generating real, sustainable cash flow and profits from a lot of the ways. Well, and maybe you can share your thoughts on that as well. But there are the most investable areas of the market, which are the big tech companies. We're also seeing, of course, in some of these smaller companies, the role of private debt that we talked about a bit earlier. But across the board, there is astronomical capex that's going towards AI data centers and chips. I wonder, talk about obviously your thoughts. How can also a retail investor separate companies generating real growth, real potential from these tailwinds from those that are just telling a great story?

Bethany McLean: It's really hard because I think AI is, without question, real. But the real question is whether the economic value it generates arrives on a schedule or arrives at all in time to justify the valuations of the companies. Many times throughout history, there's a timing lag. It's really hard to see also whether the companies that are making the big investments today are those that are going to profit from the revolution when it comes. Those are two really different things. There are some questions here. The capex is massive, and I made a face when you said sustainable cash flows because right now, even the Magnificent Seven, the hyperscalers among the Mag 7 that have been investing so heavily in capex, their free cash flow is turning negative. They're going from these massive cash generators to these companies with negative free cash flow as they spend everything on the AI Revolution.

That's a different business model than they had in the past. It is still in part because OpenAI and Anthropic aren't public. It is really hard to see what the actual end user demand is for a lot of this stuff. That really is the key question. What is the end user demand, and what are end users willing to pay for what AI can do? I don't think we know the answer to that yet.

The circular financing within the AI ecosystem makes it really difficult to see because no one breaks out clearly. Well, this percentage of my revenues came from Google who gave me this amount of cash in order to do this. You can't see how much is coming from within the ecosystem versus how much, say, Caterpillar is paying OpenAI for access for AI tools. I think there's just a lot of questions about this.

I am a believer in AI, but I am somewhat skeptical about its ability to generate the profits on the schedule that make all this happen without some gigantic hiccup. I think the complexity of the debt structures, financing some of these data centers, and the complexity of the circular revenue stream leaves open the possibility of a nasty surprise. One of the really key things in the market is confidence. Even today, nobody can actually lay out exactly why problems in subprime mortgages caused the problems that they did. There's a theoretical big picture answer to that. But if you try to absolutely track it down, why did this cause this, the answer that it comes back to is people lost confidence. What you never know when there's the potential for a big hiccup is how much confidence that causes people to lose, and then what the spillover effects of the lack of confidence end up being. That's what concerns me about where we are now.

Rachel Warren: Well, and I think that's the big question because some of these companies, you mentioned, these are some of the most financially fortified companies in the world by far, and they, of course, are seeing some strain on margins already, in some cases. Maybe you're already doing this, but if you were assigned to write the definitive investigative piece on AI Boom, what are the corners of the market that you would be wanting to dig into first? What are you watching right now?

Bethany McLean: If I could really understand. I don't think you can do this. You might be able to, but if I could go out to the 200 biggest companies in America and do a survey and understand exactly how they're using AI and exactly what they're paying for it and exactly what they see they're going to continue to be willing to pay for it, that's something I would really want to understand. If I could see inside of OpenAI and Anthropic and understand exactly where their revenues were coming from, if they broke out their revenues by the top 50 customers, that would be another way of being able to get at that.

I'd like for any company with exposure to this to lay out exactly, not just the debt on their balance sheet, but the off-balance sheet obligations that they might have if everything goes completely haywire, and one example of that is this data center that Meta financed off-balance sheet called Hyperion. That debt could come back on Meta's balance sheet in a worst-case scenario, and I'd want to understand that for every company. Not just what the balance sheet makes you show, but what else is out there that is harder to see. But all of those things are really difficult.

Rachel Warren: That's definitely part of the opacity there. I want to talk a little bit about short sellers. You have a somewhat nuanced view of short sellers. You've seen them be right with Enron wrong elsewhere. What is the role you think they play in keeping the markets honest, and how should retail investors view them?

Bethany McLean: I think they play a really good role in keeping the market honest because they're the only people who are incentivized to point out problems. Charlie Munger used to say, show me an incentive, and I'll show you the outcome. Everybody is incentivized to want things to go up because that's how people make money. That means that the market isn't quite this intellectually honest system that we all think it is because most people who are saying things are inclined to say positive things. You want the person who's willing to say negative things because you want to understand that point of view. That doesn't mean it's always right, but you want to understand what it is.

The game has changed a lot because back in the old days when I wrote for Fortune, if a short-seller came to me with an idea or said, you should look into this, nobody knew when Fortune was being published. There was no online publishing, and the magazine slowly dribbled out from New York City newsstands to places around the country. There was no way to trade on a story that I was publishing. I didn't have to worry about that. The incentives are really, really different today. You do have to be more careful about why somebody is saying something, and what impact they're trying to have in the market and how that's being disclosed.

That is really different. I have seen short sellers be wrong about their thesis, and I've seen short sellers simply be wrong about the timing, which, back to my point about Wirecard doesn't mean they're wrong. But things don't always happen. Just because you have this great realization about the flaw in a company doesn't mean the market cares. They may not care this year, they may not care next year, they may not care for five years. I think that's a question. What I don't understand is the move today, and it was true back in the old days, too, for people to say, this person is short. Therefore, they are biased. Therefore, I'm not going to listen to what they have to say. It's a market. Everybody's biased. The person who's telling you to buy the stock is biased, too. Listen, decide for yourself.

Rachel Warren: We are also very much in a time where capitalism in the public markets are shifting exponentially. I'm curious as you look at all of this. On the one hand, what do you think are some of the biggest long-term structural threats to the future of individual retail investors, and what do you think are the greatest advantages that we can tap into?

Bethany McLean: That's a big question. I worry a lot about the way capitalists are undermining capitalism itself. I still am a big believer in capitalism, but I'm not a big believer in the way it's been practiced in the last decade. Plus, the financial crisis was a big moment in time because the rich and well-off got bailed out, and the small and not-so-well-off did not. While that's their understandable reasons for why it happened that way, it still was capitalism for the least well-off and socialism for the most wellooff. I worry more and more that the most privileged in our society are finding ways to make sure that they have to be bailed out because if they're not, the whole system collapses.

I also think that this increase in income and wealth inequality is just not a great thing for the structure of our society. Back in the 1950s, when a similar thing was happening, there was a movement in corporate America to say, let's take less just to make sure that the system continues to work. You don't see anybody doing that today and saying, let me take less because I am invested in our American system, and I want this to continue to work. I understand that the way forces are going means that I can earn $1 billion or $1 trillion. But that's not stable for the country and the society that made all of this possible for me. You just don't see that of long-term thinking.

That’s what I mean about the capitalist breaking capitalism, or in some of the terrible private equity deals we’ve seen, like this hospital deal steward that I mentioned, where the private equity firm Cerberus made hundreds of millions of dollars, and hospitals that needy patients depended on ended up bankrupt. It's not a great outcome in the micro, and it's not a great outcome in the macro because you don't need many examples of that for people to say, the system doesn't work for me.

We don't want people saying that. We want our country to be stable, and I think we want our system to be stable. I think that's one of the biggest risks that I see, and I worry a lot about private credit in this respect because I do think that if there are problems in private credit, the government will have to bail it out again. I think once again, there will be a reason for doing that, and might even be a correct reason that the outcome would be worse if the government didn't step in. But once again, it's just going to be wildly unfair.

Rachel Warren: I'm curious to hear your thoughts. I think you've touched on this a little bit earlier in our conversation, but just to probe a bit more, how do you think retail investors should weigh the long-term cash generation of the old economy businesses against the massive premiums that we see Wall Street paying for these hypergrowth tech stories right now? Because we've seen obviously a lot of volatility in the markets, even though many stocks are still doing incredibly well. We also will sometimes see what looks like irrational responses, even to companies that are reporting really quality earnings and cash flow across a variety of industries. I'm curious your thoughts on how investors should view that, how you view that specifically.

Bethany McLean: Oh, dear. I've never been great in investment advice, but I guess what I would do is to have as broad an exposure to the market as you can own an index fund. It's heavily weighted now toward the hyperscalers, so you're effectively, if you own an index fund, you're making a bet on AI. Then own something that is as separate from AI as you possibly can, so that you're somewhat hedged, so that you have some capacity for some cushion if the AI trade does go badly. But I think the most important thing to realize is that your index fund isn't your index fund anymore. Meaning that the S&P 500 index funds are heavily weighted toward the hyperscalers. Your index fund is a bet on the AI economy. If you think that your index fund is still helping you profit from a broad swath of the market, it's not. I think that's something to be aware of.

Rachel Warren: Well, as you look at the state of the market over the next 3-5 years, I wonder if there's any themes that you find really interesting or exciting, and which ones are you watching with the most caution?

Bethany McLean: Unfortunately, I think that the direction of the AI trade is going to determine a lot because it is so big now, and the spending is so big as a percentage of U.S. GDP, that if that goes south, I'm not sure anything else really matters that much. If that goes wildly south, it would pull our economy into a recession. In which case, all bets aren't off, but they're all different. Maybe biotech, as risky as it is, stands apart from that, in some ways. But even that, if there's a recession, if the market craters, that will drag biotech stocks that need funding down with it, too. I think for better or for worse, we are all massively exposed to the AI trade, even if you are steering clear of all AI investments. I'm sure somebody who is more of an investment strategist than I am could suggest where you could put money that would be safe from the AI trade, but that's not really. I'm not an investment advice person, so I just don't know the answer to that.

Rachel Warren: One final question for you. Looking back at your history of reporting and all of the companies and the boom and busts that you have reported on, what are the most important traits that you've seen in leaders that succeed versus those that ultimately fail?

Bethany McLean: Though, I think it still is this old school ability to do what you say you're going to do. Despite what I said earlier about the importance of hype, and I understand why it is important in today's market ,so that you can maintain access to capital, and access to capital is in and of itself a competitive advantage. But this old school, let the results speak for themselves is still important in a background way. CEOs who do what they say they're going to do, it's really important. There has to be reality at some point in time. It is one of the things that worries me about Elon Musk; it's really hard to tell with him because there have been a lot of things he has said that have not come true and have not materialized on the schedule in which he says they're going to materialize. Yet, there are very big things that he has indisputably done. He shows how this can be really complicated. But the results do matter at some point. You want somebody who can deliver results.

Rachel Warren: Well, so much that I think you've left our listeners and viewers to think about Bethany, and I really appreciate you taking the time to come on and talk with me today.

Bethany McLean: I hope so. It's really fun. Thank you.

Rachel Warren: As always, people on the program may have interests in the stocks they talk about. The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards, and it is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. For the Motley Fool Hidden Gems Investing team, I'm Rachel Warren. Thanks for listening. We'll see you next time.

Rachel Warren has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet, Caterpillar, and Meta Platforms. The Motley Fool has a disclosure policy.