Goldman Sachs has warned that cutting back on AI investment may lead to a 15-20% drop in the S&P 500. This worry comes from the significant role AI-related companies play in the index. At present, AI spending is strong. However, some analysts expect a noticeable slowdown by late 2025, which could negatively impact stock values.

Nvidia And The AI Giants

Nvidia makes up 7% of the S&P 500. The top eight AI companies together represent over 36%, showing their strong impact on the market. Beyond the top 10, firms like Oracle, Palantir, and Cisco also contribute to the AI sector’s significance within the index. A decline in AI investment could affect the entire S&P 500. While Goldman Sachs doesn’t predict an immediate downturn, they warn that a future drop in AI spending could threaten S&P 500 valuations, especially for tech-heavy benchmarks. Given the current market climate on September 15, 2025, this warning is crucial. With the S&P 500 trading above 6,000, a 15-20% decline poses a major risk to portfolios that have benefited from AI this year. The fate of the index heavily depends on a few key companies, with giants like Nvidia and Microsoft representing over 36% of the entire S&P 500 market value.

Hedging Against Potential Downturns

In the next few weeks, we should view volatility as an undervalued asset. The CBOE Volatility Index (VIX) has been around multi-year lows near 13, making protective options contracts cheaper. We can start building positions in longer-term S&P 500 (SPX) put options or VIX call options that expire in the first quarter of 2026, which is when the spending slowdown may happen. This is a time to hedge, not panic sell. For those with large investments in tech, buying out-of-the-money put options on the Nasdaq-100 ETF (QQQ) is a straightforward way to protect against a downturn in the sector. The recent U.S. durable goods report for August 2025 showed the first decrease in new orders for computers and electronic products in six months, adding to these concerns. We’ve seen similar market concentration before, notably before the dot-com bubble burst in 2000. Although today’s AI leaders have much stronger earnings, this situation serves as a reminder that market sentiment can change rapidly. Therefore, we could consider using put ratio spreads to build downside protection while also benefiting from a slight decline or a period of high volatility. Create your live VT Markets account and start trading now.

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