AI reduces market diversification choices

Global equity markets are losing their ability to diversify risk as artificial intelligence reshapes investment flows, a boutique asset manager reported.

The S&P 500 now drives most global asset movements

Talaria’s co-chief investment officer, Chad Padowitz, stated that the share of the world’s investable assets moving in lockstep with the S&P 500 rose from 26% in 1995 to over 90% today. The shift extends beyond stocks. Bonds, property, hedge funds, and private assets increasingly follow the same pattern, with AI exposure as the common factor.

“For many investors, what appears to be a spread of risk has become a single bet,” Padowitz said. “An investor in global equity baskets today holds, in large part, a wager on a narrow group of companies tied to artificial intelligence.”

Correlations have climbed across nearly every asset class. Developed market stocks outside the U.S. now move with the index at a correlation of 0.79, up from 0.46 in 1995. Listed property jumped from 0.61 to 0.82, while hedge fund strategies reached 0.81. Even the main U.S. bond index shows a 0.60 correlation.

Padowitz cautioned that high correlations create a fragile environment. “High correlations would matter less if AI’s future were certain, but history shows that major technological shifts involve tremendous uncertainty,” he said. “The potential of AI is likely enormous, but the downside for linked assets could be severe.”

Traditional diversification strategies have become less effective as a result. “The case for diversification is strongest when portfolios that seem diversified share the same underlying risk,” he explained. “True diversification comes from owning assets with different return drivers, not just different labels.”

Few strategies now offer that independence. Talaria has adjusted by favoring short-duration holdings, companies with strong balance sheets, and real assets—positions it believes can withstand volatility without depending on AI-driven momentum.

Padowitz added that in a market where uncertainty is high, the journey matters as much as the outcome. “When valuations reach levels that have rarely preceded attractive long-term returns, how wealth moves over time becomes just as important as the end result.”

The firm has previously raised doubts about whether AI will deliver expected productivity gains. It has also warned against overreliance on U.S. Treasuries, arguing the traditional 60:40 portfolio no longer works.