New market highs and the AI race: Will it end badly?
2025 has been quite an impressive year for stocks. The unmanaged S&P 500 index is up over 15% year-to-date1 and closing in on what will likely be a third calendar year of strong double-digit returns. Will stocks continue to rise even though valuations are above their long-term historic averages? Will the race to build out artificial intelligence continue? Is this just the beginning of a new wave of technology? Will it end badly?
These are among the many questions professional and individual investors are asking.
As long term investors I’d like to start by briefly talking about where we are with AI and what investors should consider to be wise investors while avoiding unnecessary risk.
AI: It’s different this time. Or is it?
Similar to other technological innovations, AI promises to do several things:
· Save time
· Simplify processes
· Save money
These are the hallmarks of innovation. We have seen these developments over many periods. Some of you may have been around when the Internet was invented and later when cell phones were first introduced. With each introduction, there was enormous excitement and optimism. In the years that followed, businesses and consumers benefited significantly. However, there were also some promising companies that lost money and went bust.
We expect AI to be no different. In fact, it is already having a big impact. For the non-profit boards that I sit on, gone is the burdensome task of taking meeting notes as AI is now recording and summarizing discussion points in seconds after the meeting ends.
What a huge timesaver and eliminator of an annoying task!
Now that does not mean AI is a perfect notetaker. A human still needs to review what was written to ensure that it accurately reflects the discussion. But the benefits are substantial.
When we think about the advent of the Internet, it took longer to adopt and it also could not be immediately adapted to every single industry or job. AI is different in that it has the potential to impact nearly every industry and every activity in some way.
Global impact
AI is also a global development—not just something that is happening in the United States. China and Asia are deeply involved in developing AI systems both in terms of dollars invested and also in applying it to many different situations.
As with most big, innovative periods, we expect this transformation to have similarities to past innovations. But investors should also be prepared for a rough road. Innovation can be fraught with unexpected obstacles including regulation and unforeseen limitations.
The Magnificent Seven
In the US we have seen that a handful of large, technology companies are at the forefront of investing in and building AI tools. Record amounts of money (billions) are being invested now and over the next few years. It almost seems like an arms race to see who can build the biggest and best AI machine.2
Given the large capital costs of building AI systems, only the largest of firms have the resources to invest in growing and developing AI. That is part of the reason a handful of stocks have been responsible for the lion’s share of stock returns over the last few years.
Investors should not be surprised by a pull-back (or pull-backs)
The stock market is notorious for overshooting during periods of high excitement especially during innovative periods. These are often periods of great optimism and also increasing risk of decline.
Tried and true strategies
· Remain fully invested – While some of the best performing stocks may pull back in price in the short term, the long term outlook for AI is favorable. Selling out based on short term concerns or perceptions often results in missed opportunities over the long term. Besides, once you sell out, you then have to make a second decision—When is the correct time to buy back in? It has been our experience that this is not a winning strategy. Time and time again, individual investors commonly sell out near the bottom and buy more near the top of the market. By remaining invested for your long-term money, you have the potential to capture the rebound when investor sentiment improves. Most professional and individual investors miss or incorrectly time these decisions.
· Spread your money around - Keep in mind that if 10 big stocks are providing most of the returns right now, don’t forget that there are thousands of other stocks of profitable companies that make up the US and foreign equity markets. Often these companies are overlooked when a few stocks are providing outsized returns. In addition, many of these other companies will benefit from applying AI in their businesses which may provide the opportunity for lower costs, better efficiency and time savings.
· Diversify, diversify and diversify – Keeping all of your long term money in stocks overlooks the benefits of bonds and fixed income securities. Early in my career I was told that bonds are boring and stocks are where all the action is. That may be true but when things don’t look good and you are starting to worry, bonds can provide an important balance to an investment strategy. Bonds don’t tend to provide much, if any, price appreciation but they do tend to provide steady income, month after month. That is one of the reasons that retirees have historically liked income-paying bonds. They just keep paying interest while stock prices go up and down. There are other asset categories, too, that tend to be less correlated with stock price returns. These can also help to offset a short-term decline and provide an anchor during times of great uncertainty. This does not always happen and it does depend on the investment, but selecting other assets such as alternatives can provide your overall portfolio with lower price volatility and more consistent long term returns.
· Keep your Emergency Fund fully funded – Every person should have an emergency cash cushion to help them cover an unexpected cash need such as a job loss, unexpected new car purchase or repair, or family emergency. One never knows when these emergencies will come up but if you already have the cash set aside in a safe and stable bank, you will be well prepared and worry less about your money.
· Speak to a professional - If you are still worried about the market and where it seems to be headed, call your financial planner / adviser. He or she often best understands your personal financial situation and usually has a lot of experience with investing during good times and in bad.
We are at the dawning age of AI. It brings both concerns and opportunities to investors. If you have questions AI and your investments, give me a call. I’m happy to discuss the current environment and if you are properly positioned given your goals and personal situation. You can schedule a quick call with me by clicking HERE.
Lyman H. Jackson
Lyman@PlanWithFPS.com
617-630-4978
Click HERE to receive our award-winning newsletter. We never share your info and you can unsubscribe at any time. Check out our other blogs at www.PlanWithFPS.com/blog
· Couples and money: Making it work
· Why plan? After all, I’m not going to live very long
1 As of November 10, 2025.
2 There can be significant rewards to firms that are first to market or first to dominate a market segment. Having a large presence with an all-encompassing product (think Google) can provide a company with outsized control of consumers, pricing and profits.
©2025 by Financial Planning Solutions, LLC (FPS), a Registered Investment Advisor. Reprinting or redistribution only by permission. This blog was written by a professional with 30 years of real-world experience in finance. AI did not write this article. FPS provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client after entering into an advisory relationship. The information herein includes opinions and forward-looking statements that may not come to pass. Information is derived from sources believed to be reliable. Information is at a point in time and subject to change without notice. Such information may not be independently verified by FPS. Please see the important disclosures link at the bottom of this page.