While artificial intelligence (AI) has a lot of promise, it is also being accompanied by a lot of unknowns and some fears, as well. If AI starts to replace human workers on a larger scale (its already doing it on a small scale), the potential for a recession is certainly possible. Throw in the ongoing trade war, and there is a lot of economic uncertainty out there right now.
In a recent Motley Fool survey, investors were modestly bullish on stocks, with nearly 70% predicting gains of 4% or more in 2026. However, a recession (45%) and a weakening labor market (37%) were two top concerns. While the thought of a potential recession or AI apocalypse is scary, investors should not lose sleep over it.
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The fact of the matter is that while some individual stocks may not recover, the broader stock market always does. A J.P. Morgan study found that between 1980 and 2020, 40% of stocks in the Russell 3000 Index, which consists of the 3,000 largest U.S. companies, saw a 70% or more decline in their stock price from which they never recovered. That’s scary, but at the same time, the S&P 500 generated strong returns over this period.
The reason for this is that indexes like the S&P 500, Russell 3000, and Nasdaq-100 are weighted by market capitalization. This means that the larger a company is by market cap (share price multiplied by shares outstanding), the larger the percentage of the index it becomes, and the more its performance affects the index’s performance. Due to this dynamic, J.P. Morgan found that about 10% of the stocks in the Russell 3000 tended to be megawinners, and that it was these stocks that helped power the index’s returns.
As we embark into the unknown with AI, it is important to remember that there have been many technological shifts throughout history. Both humans and the market adapt. Some jobs may fade away, and new ones will replace them. At the same time, some companies will eventually become irrelevant, while some will adapt to become stronger, and new companies will emerge that become the next market leaders.
At the end of the day, the broader market always recovers. The simple proof of this is that we recently hit new highs in the market just this year. Just this century, the market has dealt with the 9/11 terrorist attacks, a housing market and financial system collapse, and a pandemic, yet the market has always rebounded. The market will certainly be able to handle an AI bubble bursting without too much permanent damage.
