Tech Stocks Powered Retirement Portfolios For Years. Now AI Is Crashing The Party

Most retirement funds have long reaped the benefits of tech dominated stock indexes driving compounded annual returns. Now the AI boom is upending software valuations, straining Big Tech's spending model, and threatening millions of nest eggs. ince the 2008 financial crisis, retirement savers have benefited from the sustained surge in technology stocks, which have consistently outperformed traditional value allocations. The Nasdaq-100 delivered roughly 17% annualized returns from 2009 through 2025, while the tech-weighted S&P 500 indexes chugged along healthily at 11% annually over that period. The arrival of AI initially accelerated that trend. Investors and fund managers poured money into mega-cap tech stocks like Microsoft, Google and Meta on the belief that their huge AI capital expenditures will unleash productivity and new business opportunities. Software firms also continued to perform well, driven by the assumption that AI would increase the value of software rather than replace it. That assumption has not held. This year investors have aggressively repriced software risk as it becomes clear that AI coding tools like Anthropic's Claude Cowork and Codex can, with hours or days of prompting, create products that rival what many SaaS firms spent years building. Popular software exchange-traded fund, iShares' IGV ($10 billion, assets) is down 25% this year. The mega-cap tech stocks have also declined amid broader market pullback over the Iran war and as investors reassess the durability of the AI trade itself. Year to date, shares in the largest tech companies -- known as the Magnificent 7 -- have lost 11% on average. U.S. retirement portfolios -- particularly 401(k)s and target-date funds -- have become heavily concentrated in tech after a decade of outperformance, leaving millions of savers exposed to the same repricing now hitting public markets. Ten of the largest actively managed mutual funds used in 401(k) plans have, on average, 38% of their portfolios in the technology and communication services sectors, according to data from Morningstar compiled by Forbes. (Communications services include tech mega caps like Alphabet, Microsoft and Meta). The sector's recent losses and uncertainty surrounding AI's impact on valuations are especially troubling for those approaching or early in their retirement because they are often forced to withdraw funds, selling stocks at lower values. This is what's known as sequence-of-returns risk: When funds are withdrawn while the portfolio is down, it leaves less capital to recover, permanently impairing the compounding effects of any recovery. Few understand these risks like Bill Bengen, a 77-year-old M.I.T. graduate and retired financial advisor whose research produced the 4% Rule (also known as the Bengen Rule), which dictates how much retirees can safely withdraw from their retirement accounts annually. Bengen tells Forbes that he's reduced his own exposure to equities by roughly half in the last few years -- from 65% to 32% -- and that he now has no exposure to tech stocks. "As doubts start to surface about [mega cap firms'] ability to fund these huge expenditures and the impact of AI on software companies, I just think at this point it's too difficult to determine how it'll shake out," Bengen says. "We missed some of the upside, but we've also in this recent downturn done much better than you would expect." For nearly all 401(k) holders, the trillion-dollar question is whether the Magnificent Seven -- Apple, Microsoft, Alphabet (Google), Amazon, Meta Platforms, Nvidia and Tesla -- continue growing while becoming some of the biggest AI spenders. Those seven stocks currently account for about one-third of the entire S&P 500 index. Then there are AI firms OpenAI and Anthropic, which are mooting initial public offerings later this year at huge valuations. "The mega caps still have high multiples meaning high growth expectations. If those expectations aren't met, stock prices will likely fall or at least grow more slowly," says Allan Roth, founder of investment advisory firm Wealth Logic, which advises clients with portfolios ranging from $10,000 to $50 million. "Because the mega caps make up so much of the market, that [would] be a drag on market returns." Some are skeptical the huge tech firms will ever see ROI on their huge AI capital expenditures. "[In my opinion] this will one day become a fascinating case study [of] how the arguably greatest generation of stocks strangulated itself after running out of other enemies," said financial analyst and author of the newsletter Fallacy Alarm Rene Bruentrup in November, near the market peak. Critics like short seller Michael Burry argue that Big Tech firms are inflating current earnings by depreciating AI infrastructure (GPUs and servers) over unrealistically long time horizons. This has the effect, Burry says, of understating the true cost of capex while providing an artificial boost to earnings. Carolyn McClanahan, who leads $350 million Jacksonville, FL-based Life Planning Partners, Inc., sees the recent volatility in the tech sector as arguments for investor diversification and patience. She makes sure her clients have meaningful exposure to domestic small cap stocks, international large caps and emerging markets to protect against tech downside. "Sectors rotate and you have no way of knowing which sector is going to be in vogue and which sector is going to be out of vogue," she tells Forbes. "You have no idea when sentiment will change." Meanwhile, other wealth managers are doubling down on big tech in client portfolios. Phil DeAngelo, managing director of $2.3 billion Newburgh, NY-based advisory firm Focused Wealth Management is advising his clients to "buy the dip." Rick Ferri, a fee-based advisor and longtime proponent of low-cost index funds, looks forward to a big tech pullback. "To me, the occasional flushing-out of weak players in the markets is a good thing," he says. "We have not had a correction since Covid. Having one now sets up patient investors for larger gains down the road." Even tech skeptic Bill Bengen sees the reason in that kind of logic. He recommends that people in their working years put 100% of their retirement savings into equities until they are five years out from retirement. That is when the tough decisions about portfolio allocation need to be made. "Retirees cannot be passive investors completely," he says. "That's an easy way to lose a lot of money."