A critical and often overlooked aspect of the current market structure is the role of passive investing. Klarna CEO Sebastian Siemiatkowski has shined a spotlight on this issue, warning that “automatic wealth” allocation is pumping up the AI bubble to dangerous levels. Because most people invest through index funds and pension schemes, their money is blindly buying shares of companies like Nvidia and Microsoft, regardless of valuation.
This mechanism creates a self-fulfilling prophecy: as the stock price rises, the company’s weight in the index increases, forcing funds to buy even more of it. Siemiatkowski argues that this happens without “thoughtful thinking,” leading to a disconnection between price and value. Nvidia’s $4.5 trillion valuation is partially a result of this passive flow.
The danger arises when the flow reverses. If active managers start selling—as implied by the Bank of America survey showing 45% fear an AI bubble—the index funds will eventually be forced to sell too. This could lead to a cascade of selling that hurts the average person’s retirement savings disproportionately.
We are already seeing the speculative fringe of this market collapse. The crypto market, which is dominated by retail money, has lost $1 trillion. Bitcoin’s drop to $91,212 is a warning of what happens when momentum turns. Retail investors, often the last to know, are left holding the bag.
The warning is clear: passive investing works well in a bull market, but in a bubble, it ensures you own the most overvalued assets right before they crash. With leaders from Google and JP Morgan sounding the alarm, now may be the time for investors to look under the hood of their index funds and see exactly what they own.