It obviously hasn't happened yet. The risk of artificial intelligence (AI) stocks like Nvidia or Broadcom being in a bubble on the verge of popping, however, still looms large. Wise investors are preparing ahead of time, rather than risking being in a position that may force them into making a quick -- but ultimately misguided -- decision.
To this end, what should everyone at least start thinking about doing if AI stocks start to suffer a major correction? Here are three biggies that should help your portfolio hold up when it seems like everything is imploding.
Small caps
Artificial intelligence stocks haven't just outperformed the rest of the market since late 2022, when the launch of ChatGPT kicked off AI-mania. This leadership has come at the expense of other segments of the market.
And one segment in particular that investors have avoided in order to own more AI stocks is small-cap names. Now they're well undervalued. Indeed, numbers from Yardeni Research indicates the S&P 600 Small Cap Index's trailing price-to-earnings ratio is only 16, while its forward-looking P/E ratio is not much higher at 16.4. Both are below long-term norms.
Image source: Getty Images.
If the AI bubble bursts here, it will mostly impact large-cap technology stocks. This could actually push the crowd back toward smaller names as a safe(r) haven.
Dividend-paying value stocks
Then there's the obvious defense against a meltdown of the market's most overvalued tech names. That's value stocks, including dividend payers. Like small caps, these stocks have underperformed specifically because so many investors have insisted on scooping up so much exposure to the AI revolution.
That said, it's worth noting that the Schwab U.S. Dividend Equity ETF (SCHD 0.18%) -- which has underperformed specifically because it doesn't own any of the hottest AI tickers -- has suddenly perked up while most artificial intelligence-related technology stocks have flattened of late. The shift may already be underway.
NYSEMKT: SCHD
Key Data Points
And if you're willing to dig deeper into this sliver of the market, start your search within the energy and basic materials sectors (except for gold, which has recently raced to record-high prices that will be difficult to maintain). In uncertain environments, the market appreciates physical, tangible assets. As for energy stocks, these names have simply been suppressed of late because oil prices have been weak. Consumption of oil and gas, however, is as strong as it's ever been. Indeed, the International Energy Agency recently suggested that the world will consume 860,000 more barrels of crude per day than it did in 2025.
Just keep it in perspective
With all of that being said, don't lose perspective on just how localized the feared AI bubble may be. While the S&P 500's current forward-looking P/E ratio stands at an unusually high 22.2, according to Yardeni Research, stripping out the "Magnificent Seven" names like Microsoft and the aforementioned Nvidia from that figure dials it back to a more palatable 20.3. You may be fine simply by shedding the small handful of AI-driven stocks that have soared of late. At the very least, most other large-cap stocks aren't at tremendous risk of being dragged sharply lower by a popping of the AI bubble.
