The recent rise in interest rates has introduced fresh uncertainty into risk markets. As the fourth quarter begins, investors should reassess portfolio concentration and confirm whether their diversifiers are still performing as intended. Disciplined risk management matters more than ever in the current environment.
Risk assets have delivered strong returns over the past several years, supported by resilient U.S. economic growth and a robust earnings outlook. That performance, however, has also increased portfolio concentration, particularly driven by technology-led U.S. growth. The AI infrastructure buildout is an important part of that exposure.
We estimate that AI-related companies now represent about 25-28% of U.S. equity market capitalization, yet they account for roughly 50% of marginal risk. Many portfolios, and markets more broadly, may depend more heavily on this single theme than investors realize. The same is true for a number of other global markets, including Japan, Korea, and Taiwan. This is not necessarily a reason to reduce the position. It is a reason to understand the extent of the exposure and determine whether the rest of the portfolio still provides effective diversification.
Watch the Bond-Equity Correlation
The issue becomes more pressing when rates are considered. Yields on 10- and 30-year U.S. Treasuries recently reached multidecade highs, approaching levels at which bonds begin to negatively affect equity valuations. Historically, when the U.S. 10-year approaches the 5.50% level, it puts pressure on equities.
The same forces have been driving higher both equity markets and yields: a resilient economy, technology-led growth and continued investment in AI infrastructure. One theme is therefore influencing both sides of the portfolio.
In the short term, a slowdown in U.S tech-led growth would pose risks. Over the longer term, however, a more measured pace of investment could be healthy. Better alignment between demand and the supply of computing capacity, semiconductors and infrastructure would reduce the risk of speculative excess and the sharper corrections that can follow it.
Know Your Diversifiers
This is not a call to retreat from risk assets, as we discussed in our recent piece, Equities Conviction Where It Counts. It is a call to reconsider what diversification means in today’s market, rather than assume that traditional relationships will continue to hold.
Investors should identify where their portfolios derive genuine diversification, looking beyond broad asset-class labels. Even high-grade fixed income, traditionally viewed as a counterweight to equity risk, may now be more sensitive to similar market forces. An allocation that once provided diversification may no longer do so. In a traditional 60/40 portfolio, both components may increasingly depend on the same underlying driver.
Discipline Rather Than Reaction
Given this backdrop, we enter the fourth quarter with a more cautious near-term stance while remaining broadly constructive on risk assets. Higher long-term rates and the prospect of modest policy tightening support adjusting risk at the margin, not changing the overall investment view.
The earnings outlook remains strong, and the U.S. economy continues to show resilience. Those strengths have contributed to the rise in rates, and they make it even more important to address concentration and correlation risks before the next market correction. After such a strong run, disciplined rebalancing and genuine diversification—not merely the appearance of it—remain essential to building durable portfolios.
What to Watch For
Monday 10/05
- U.S.: Services Purchasing Managers' Index
- U.S.: ISM Non-Manufacturing Purchasing Managers' Index
- U.S.:ISM Non-Manufacturing Prices
Wednesday 10/07
- U.S.: 10-year Note Auction
- U.S.: Federal Open Market Committee Meeting Minutes
Thursday 10/08
- U.S.: Initial Jobless Claims
