Lo and behold, another second-quarter stock market comeback. After a shaky start to 2026, I pointed out that stocks have a habit of stumbling early then finding their footing. It happened in 2018, 2020, and 2025.
In an echo of the second quarter of 2025, stocks overcame geopolitical risk and rebounded on techno-optimism in April and May 2026. Whereas the first quarter’s focus was artificial intelligence’s disruptive potential, especially related to software, the second quarter was dominated by the AI infrastructure buildout—on earth and in space. The Magnificent Seven (Alphabet, Amazon.com, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla) story faded, as did the HALO Stocks that led in the first quarter. AI stocks have been so successful that several have joined a Triple-Digit Club.
Then came a June selloff that demonstrated market risks. Higher-for-longer interest rates, elevated valuations, and fears of AI overinvestment have all been blamed. Is this just a temporary pullback, of the type we saw in March 2026, November 2025, or December 2024 (among others)? Or is a correction coming? No one knows. But we should take the opportunity to assess our portfolios and ensure they’re prepared for a range of scenarios.
AI Stocks, Beyond Just the Magnificent Seven, Led the Q2 Comeback
A reporter recently asked me if the Magnificent Seven has been eclipsed by the “MANGOS.” It’s hard to keep up with the ever-evolving shorthand for market leadership. The grouping that started life way back in 2013 as FANG, then evolved into the Magnificent Seven, now seems to include newly public and soon-to-be-public companies. MANGOS, for the uninitiated, stands for Meta META, Anthropic, Nvidia NVDA, Google GOOGL, OpenAI, and SpaceX SPCX.
To me, that term misses a broad AI stock boom that lifted the Morningstar Global Next Generation Artificial Intelligence Index roughly 45% in April and May 2026 before retreating in June.
Of course, AI has been the dominant stock market theme for 3.5 years. Morningstar’s global AI index has risen more than threefold since the launch of ChatGPT in late 2022. The recent catalyst has been a tsunami of capital expenditure in AI that has benefited companies involved in semiconductors, memory, and data centers.
The infrastructure buildout boom is responsible for the second-quarter 2026 returns for Morningstar’s global AI index. It’s a boom that has seen chip stocks Broadcom AVGO and Micron Technology MU join the US market’s top 10 (as of May 31, 2026). It’s evident in triple-digit second-quarter returns for disc drive companies Seagate Technology STX and Western Digital WDC. And it’s reflected in the fact that the five largest non-US stocks—Taiwan Semiconductor TSM, Samsung Electronics 005930, SK Hynix 000660, ASML ASML, and Tencent 00700—are all AI beneficiaries.
Meanwhile, AI model makers are propelling private company valuations to ever higher heights, with more mega-IPOs lining up to follow SpaceX. Gravity-defying private market valuations are responsible for a triple-digit year-to-date gain for the Morningstar GenAI 20 Index in 2026. All the constituents of that index are currently private; prices are provided by secondary market platforms.
Is There an AI Bubble?
Skeptics see a bubble. They say the AI infrastructure buildout follows a historic pattern of overinvestment in new technologies. Like the railroads and the internet before it, the AI boom could be headed for an inevitable bust.
In a scary parallel to the late 1990s, when the “dot-com” suffix was thought to be a road to riches, the shoe company Allbirds rebranded to Smartbird BIRD, after a pivot to AI infrastructure. They’re hardly the only ones. See: Is Ford Stock Now an AI Play, Too?
Meanwhile, SpaceX’s June IPO has been pointed to as a sign of froth. In the view of Morningstar equity analysts, the company’s $1.75 trillion valuation at the time of listing was more than double its intrinsic value. It reflected “buoyant investor appetite for AI infrastructure bids.”
Most bears don’t deny that AI’s a marvel; they just question valuations and whether returns will justify investment. AI is costly. Can productivity or revenue gains compensate for spending on computing power, electricity, and data centers?
It’s concerning that OpenAI lost $7 billion in the first quarter of 2026. According to analysis from PitchBook, it costs the company $2.22 to generate $1.0 in revenue.
Cheaper AI models, many from China, pose a threat. Remember the launch of Chinese DeepSeek AI in early 2025 and the selloff it prompted in US tech stocks? In what could be a sign of things to come, Uber UBER announced a switch to lower-cost models after blowing through its entire 2026 AI budget in the first quarter of 2026.
Ultimately, the future of AI is unknown and unknowable. On the one hand, we hear predictions of 15-hour work weeks, or even the end of work as we know it. On the other, there’s “AI slop” and “hallucinations.” Environmental concerns and roadblocks of a legal, policy, or regulatory nature are all risks. Then there’s the fact that new technologies can take time to monetize. Historically, benefits have flowed more to users than providers.
Concentration Risk Merits Diversification
Whatever your views on AI, the US stock market’s heightened dependence on it raises risks. Concentration has increased. At 37.5% as of May 31, 2026, technology stocks’ share of the US stock market now surpasses levels seen during the late 1990s internet bubble. This does not count Alphabet and Meta, which are classified in the communication-services sector, or Amazon.com, considered a consumer cyclical. All are heavily involved in AI.
Diversification is a sensible response. Bonds, especially a Treasury-heavy “core bond” allocation, provide a decent hedge. Yields at 20-year highs offer both income and a solid starting point for total return. Within equities, including small caps and international stocks can balance the pricey, top-heavy, tech-heavy, US market.
Time will tell whether AI dwarfs the industrial revolution, is overhyped, or simply experiences nonlinear growth. Given the US stock market’s current exposure to AI, caution is warranted. The June selloff demonstrates vulnerability to sudden reversals in sentiment. Volatility is to be expected.
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