3 reasons the stock market's AI surge will stumble in 2026, according to one investing legend

• 2026 is the year the AI-fueled bull market will finally stumble, according to Mohamed El-Erian.
• The former PIMCO investment chief said he believed hype for AI would be challenged by "unsettling" economic trends.
• He pointed to headwinds like rising inequality, geopolitical tensions, and fears of a market bubble.

AI-driven market mania will hit a roadblock this year, Mohamed El-Erian says.

The top economist and former co-CIO at PIMCO sees trouble ahead for the AI trade. While artificial intelligence powered the market to fresh records in 2025, that rally is likely to stumble this year thanks to "unsettling" structural changes in markets and the economy, he said in a recent op-ed for Project Syndicate.

The former bond trader advised investors to shift their strategy in the coming year, focusing more on fundamentals and identifying firms able to use AI in "practical applications."

"As we move further into 2026, the AI narrative is unlikely to prove strong enough to continue overshadowing other lingering uncertainties, many of which reflect deeper structural shifts," El-Erian wrote on Monday. "For investors, the standard playbook will need to change. Riding a broad structural wave is no longer such an obvious and rewarding strategy."

He pointed to a few trends he believed could rattle the AI trade this year:

1. Rising economic inequality

The US economy is seeing a "'K-shaped' divergence," El-Erian said, referring to an economic model where the gap between high-income and low-income Americans widens.

That has a troubling implication for economic growth, El-Erian suggested. Speaking at Yahoo Finance's Invest Conference last year, he said that he believed lower-income consumers were already "near recession," pointing to pressures like elevated inflation, rising layoffs, and high consumer debt levels.

"If the lower household incomes stop spending, not because they don't want to spend, but they're not able to spend — that will contaminate upwards for the economy as a whole," he said at the time."

2. Rising geopolitical tensions

International conflict is another issue that could hurt the appetite for AI among investors, El-Erian said. He pointed to rising tensions between the US and Venezuela after the US raided the country and captured its president earlier this month, which sparked fresh market volatility.

"Wherever you look, the traditional factors underlying economic and commercial activity are likely to be increasingly sidelined by national-security concerns, geopolitics, and domestic political machinations," he wrote. If 2025 was about ignoring the market spillovers of domestic and international politics, 2026 will be about navigating them."

3. Fears of a bubble

Fears that the market may have run ahead of itself when pricing in the benefits from AI are another limiting factor on the rally, El-Erian suggested.

"The animal spirits that drove indiscriminate, massive financing last year will increasingly be tamed by bubble fears that force investors to be more selective," he added.

Speaking to Yahoo Finance! last year, El-Erian described AI as a "rational bubble," which he said could result in painful losses for investors down the line.

El-Erian, who was vocal about the risks of a recession and a potential stock market crash as interest rates were rising, has struck a milder but still-cautious tone more recently. Lately, he's held off on making concrete recession or stock calls, but has warned of a slew of signals that worry him in financial markets.