GMO’s asset allocation chief warns of market headwinds driven by expensive AI stocks
Ben Inker, co-head of asset allocation at GMO—the investment firm cofounded by legendary value investor Jeremy Grantham—is forecasting modest losses for the S&P 500 in 2026, primarily due to overvaluation in artificial intelligence stocks. However, unlike GMO’s historically bearish calls, Inker isn’t predicting a catastrophic market collapse.
Inker’s central thesis revolves around a market rotation away from expensive AI stocks that currently dominate the S&P 500’s weighting. He expects AI-related companies to underperform as investors gradually shift capital into undervalued sectors of the market. This rotation dynamic has already begun manifesting periodically over recent months, creating downward pressure on the broader index.
“Our best guess is that in 2026 the S&P is more likely to be down than up,” Inker told Business Insider, projecting single-digit percentage losses for the benchmark index. The forecast stems from AI stocks’ outsized influence on the S&P 500 combined with their stretched valuations.
Crucially, Inker distinguishes the current environment from past mega-bubbles. The speculation appears contained within the AI trade rather than infecting all asset classes. He contrasts today’s market with the 2000 dot-com bubble and 2008 financial crisis, when overvaluation was pervasive across stocks, credit, real estate, and virtually every risk asset. “Today, the AI stocks are overvalued, growth stocks in the US are overvalued, but not really that much else,” Inker explained.
This localized overvaluation creates both risk and opportunity. While AI and US growth stocks face headwinds, pockets of value exist elsewhere in the market. Inker highlighted that many non-AI stocks within the S&P 500 remain “really pretty cheap” and could rise even as AI names decline, partially offsetting losses in the broader index.
GMO’s preferred investment opportunities lie outside the AI-dominated US large-cap space entirely. Inker specifically favors Japanese small-cap stocks and European value stocks, where valuations remain more attractive and speculation hasn’t driven prices to unsustainable levels.
The forecast reflects growing concerns about AI stock valuations after their extraordinary rally, while acknowledging that the current market structure differs fundamentally from previous bubble episodes.
Key Quotes
Our best guess is that in 2026 the S&P is more likely to be down than up. We are not forecasting a collapse, because we expect what we’re going to see, to a significant degree, is a rotation — that the AI names will get hit, and they are of course a big part of the S&P.
Ben Inker, GMO’s co-head of asset allocation, outlined his central forecast for the S&P 500, emphasizing that losses will likely stem from AI stock underperformance rather than a broad market crash.
Today, the AI stocks are overvalued, growth stocks in the US are overvalued, but not really that much else.
Inker distinguished the current market environment from past bubbles, noting that speculation remains concentrated in AI and US growth stocks rather than spreading across all asset classes as occurred in 2000 and 2008.
It’s not as extreme as what we saw in 2000, and it hasn’t infected everything. So one of the problems that can happen in bubbles is like in 2008, nothing was as expensive as internet stocks were in 2000, but every risk asset everywhere was overvalued.
Inker provided historical context for why he doesn’t view the current AI stock valuations as constituting a mega-bubble, despite clear overvaluation in specific sectors.
Our Take
GMO’s measured bearishness on AI stocks represents a crucial counterpoint to the prevailing enthusiasm surrounding artificial intelligence investments. What’s particularly noteworthy is Inker’s nuanced view—acknowledging AI overvaluation without predicting apocalypse. This suggests sophisticated investors are becoming selective rather than abandoning AI entirely.
The rotation thesis is compelling: as AI stocks have dominated returns, they’ve created their own vulnerability through concentration and valuation expansion. The next phase may reward investors who look beyond the obvious AI plays to find value in overlooked sectors.
However, timing such rotations is notoriously difficult. AI’s transformative potential could continue justifying premium valuations longer than value investors expect, especially if major breakthroughs materialize. The key question is whether AI companies can grow into their valuations or whether expectations have outpaced realistic outcomes. GMO’s track record of early bearish calls suggests caution, but also highlights the challenge of market timing even with sound fundamental analysis.
Why This Matters
This forecast from GMO carries significant weight for AI investors and the broader technology sector. As one of the most prominent value-oriented investment firms, GMO’s warnings about AI stock overvaluation signal potential turbulence ahead for the companies that have driven market gains.
The prediction matters because AI stocks have become heavily concentrated in major indices, meaning their performance disproportionately affects overall market returns and retirement portfolios. A rotation away from AI could trigger substantial wealth effects and reshape investment strategies across the industry.
More importantly, Inker’s analysis suggests the AI investment boom may be maturing from its speculative phase into a more discriminating period where fundamentals matter. This could separate sustainable AI businesses from overhyped players, ultimately creating a healthier market structure.
The contained nature of the speculation—unlike past bubbles—suggests any correction might be manageable rather than catastrophic, potentially allowing capital to flow into undervalued sectors without systemic damage. For investors, this signals the importance of diversification beyond AI-focused portfolios and attention to valuation metrics even in transformative technologies.