The Looming 2026 AI-Driven Stock Market Correction: Structural Risks in Big Tech Valuations and Depreciation Practices

The AI revolution has reshaped global markets, with Big Tech firms at the forefront of a speculative frenzy. Yet beneath the surface of soaring valuations and record earnings lies a growing structural risk: the interplay between aggressive depreciation accounting practices and inflated valuation metrics. As 2026 approaches, investors must grapple with whether these practices are masking vulnerabilities that could trigger a market correction.

The Depreciation Dilemma: Artificial Earnings Inflation

Big Tech companies have extended the useful lives of AI-related assets, such as GPUs and data centers, to reduce depreciation expenses and inflate reported earnings. For example, Meta increased the depreciation schedule for its server equipment from 4.5 to 5.5 years, potentially cutting 2025 depreciation costs by $2.9 billion. Michael Burry, the investor who famously shorted the 2008 housing bubble, has warned that such practices could understate depreciation by $176 billion across the industry from 2026 to 2028. This accounting maneuver artificially boosts net income, creating a misleading picture of profitability.

Critics argue that AI hardware obsolescence is accelerating due to rapid technological advancements, making extended depreciation schedules economically unsound. While some experts suggest older hardware can still generate value through repurposing for inference workloads, the debate underscores a critical disconnect between accounting rules and real-world asset lifespans.

Valuation Metrics: A House of Cards?

The structural risks extend beyond accounting. Big Tech's P/E ratios in 2025 averaged 70x for the "Magnificent 7" and 36x for the median, far exceeding historical averages for the S&P 500 and Nasdaq. These valuations are driven by speculative bets on AI's transformative potential, despite modest revenue growth for some firms. For instance, Alphabet and Micron Technology saw significant stock price gains in 2025 despite incremental revenue increases.

The Buffett Indicator-a measure of total U.S. stock market capitalization relative to GDP- reached 221% in 2025, a record high. While this metric reflects overall market overvaluation, Big Tech's dominance in the S&P 500 accounting for 30% of its value amplifies systemic risks. A correction in these stocks could ripple across the broader market, particularly if AI demand fails to meet expectations.

Structural Risks Beyond Depreciation

Big Tech's strategies to offload AI infrastructure risks further complicate the picture. Companies like Microsoft, Meta, and Google have shifted capital-intensive projects to smaller firms and private lenders, maintaining financial flexibility while reducing transparency. This outsourcing creates a "stranded asset" risk for smaller entities if AI demand wanes.

Additionally, the sector's concentration in the S&P 500 raises concerns about market fragility. Goldman Sachs notes that while valuations remain below dotcom-era peaks (276x average P/E), earnings growth has partially justified current levels. However, the Fed's potential reluctance to act as a stabilizer in future crises- exacerbated by tight dollar funding markets-adds another layer of uncertainty.

The Path to a 2026 Correction

A market correction is not inevitable, but the risks are mounting. The recent 4.4% drop in the Nasdaq has been framed as a "healthy recalibration," yet deeper vulnerabilities persist. If AI hardware obsolescence accelerates or demand for computing power plateaus, firms with inflated earnings (due to extended depreciation) could face sharp profit declines. Asset impairments and write-downs-already a looming possibility-could trigger a cascade of sell-offs.

Investors should also monitor the economic impact of AI. While Vanguard projects 3% real GDP growth from AI investments, volatility and creative destruction from new entrants remain risks. The sector's reliance on speculative capital- $200 billion in AI venture funding by late 2025 -further heightens the potential for a bubble burst.

Conclusion: Navigating the Risks

The 2026 AI-driven market correction hinges on two critical factors: the alignment of depreciation practices with economic reality and the sustainability of current valuations. While Big Tech's earnings growth has justified some optimism, the structural risks-accounting manipulation, overvaluation, and infrastructure overbuilding-demand caution. Investors must weigh the transformative potential of AI against the fragility of a market built on speculative foundations.

As the Buffett Indicator and P/E ratios suggest, the sector is primed for volatility. Those who ignore the lessons of the dotcom bubble-or the 2008 crisis-risk being caught unprepared when the next wave of creative destruction arrives.