Worried About an AI Bubble? Three Strategies for Diversification

As of September 30, 2025, the top eight companies account for 37% of the S&P 500's total weight. This concentration has raised concerns among investors regarding portfolio risk and the potential for an AI‑driven market bubble.

The S&P 500 Index is poised to deliver its third consecutive year of double‑digit gains, marking six such years in the past seven. A significant driver of this performance has been the unprecedented investment in artificial intelligence (AI) by the index's largest constituents.

Diversification Remains Effective

Although the S&P 500 continues to perform strongly, other asset classes and strategies have generated attractive returns with far less reliance on AI investments. Three notable examples are outlined below.

1. Bonds. Fixed income securities remain a cornerstone of diversification. While bonds generally offer lower returns than equities, they can provide stability and reduced volatility.
   
   
   • The Bloomberg Aggregate Index has returned 6.73% year to date through December 11, 2025, following a 5.9% gain in 2024.
   • Bond performance is driven primarily by yield and credit quality, rather than technological trends.
   • The index is composed of U.S. Treasury securities, government agency bonds, and investment grade corporate debt.
   
   
2. International Equities. Global markets have delivered robust results in 2025, offering diversification away from U.S. technology concentration.
   
   
   • The MSCI EAFE Index has returned 27.95% year to date through November 30, 2025.
   • Unlike the S&P 500, where information technology and communication sectors represent nearly 50% of the index, these sectors comprise only 13% of the MSCI EAFE index.
     
     

   Although international equities have historically lagged U.S. markets—with five and ten year average annual returns of 11.3% and 8.2%, respectively—their lower exposure to technology may now serve as a stabilizing factor.

3. Equal Weight S&P 500 Index. For investors who wish to maintain U.S. equity exposure while mitigating concentration risk, the equal weight version of the S&P 500 offers a compelling alternative.
   
   
   • Each constituent carries the same weight (approximately 0.20%), reducing the dominance of AI focused firms.
   • Information technology and communications sectors represent 18.5% of the equal weight index, compared with nearly 50% in the standard S&P 500.
     
     

   This structure provides broader sector balance while retaining exposure to the overall U.S. equity market.

Conclusion

Concerns regarding an AI bubble are understandable given the sector's outsized influence on U.S. equity performance. However, investors have multiple avenues to diversify risk. Bonds can temper volatility; international equities provide global exposure; and equal‑weight indexes reduce concentration within the S&P 500.

Ultimately, the appropriate strategy depends on the specific risk an investor seeks to address—whether it is overall market volatility, reliance on U.S. equities, or sector concentration. Diversification remains a prudent way to enhance portfolio resilience in an era of rapid technological change.

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