Ray Dalio, founder of Bridgewater Associates, recently described artificial intelligence (AI) as a "classic bubble" and warned that markets may be approaching the point where such bubbles typically burst. For investors who share Dalio's concern, the practical question is how to align portfolios with that view without wholesale liquidation.
How AI’s market influence has shifted
Bloomberg data show that in 2022–2023, stocks least exposed to AI — for example utilities, food companies and energy firms — still exhibited a rolling correlation of about 0.5 with a global AI index. Since then that correlation has fallen to -0.4, meaning that when AI-sensitive names such as Google or Nvidia decline, companies like Duke Energy or Coca-Cola tend to rise.
The correlation gap between the most and least AI-exposed quintiles has widened to its largest recorded level. In practice, on the worst days for the AI index — when it typically fell by about 2 percent — the least-exposed quintile of stocks was effectively flat.
Regions and markets that have offered protection
Global diversification reduces downside but unevenly. The MSCI All Country World Index declined by roughly 1 percent on average on the worst AI days, about half the fall of the sector index.
Some markets were notably less affected: the United Kingdom, where exchanges are dominated by banks and oil companies, saw only an average 0.3 percent drop on those days. China proved even more insulated, with an average fall of about 0.1 percent. Malaysia, India, Australia and European markets excluding the UK also offered relative protection. By contrast, Japan performed worse because of the heavy weight of semiconductor manufacturers, and South Korea and particularly Taiwan were also more sensitive.
Practical ways to reduce AI exposure
The article outlines several tools and approaches investors can use to reduce AI-related risk:
- Equal-weight S&P 500 funds: these can lessen the outsized impact of large, AI-sensitive companies.
- Regular, disciplined rebalancing of AI positions: periodic adjustments reduce concentration risk.
- Traditional safe havens: gold, cash or short-term bonds can offset risk.
- Options-based protection: buying put options on the Nasdaq index is a more aggressive hedge, though inverse or short ETFs carry significant risks and should be used cautiously.
The author’s personal positioning
The article's author says they have simplified their own portfolio: materially underweight the US market, overweight the United Kingdom, hold bonds, and build a larger yen position. The Japanese yen has historically tended to strengthen during periods of market stress and is treated here as a defensive currency.
Why this matters
Dalio’s warning, together with the correlation data, indicates that AI-driven gains and losses are increasingly decoupled from broader market moves. For investors concerned about a potential bubble, limiting exposure through diversification, weighting strategies and targeted hedges can help manage risk while avoiding the need for blanket sell-offs.
This article does not constitute investment advice or a recommendation.
Note: an AI assistant contributed to preparing this article; the final content was edited and verified by the journalist.
