Notes on the economy: Diversification in seasons of strong market performance

For much of the past several years, U.S. stocks have been the clear leader in global markets, fueled by artificial intelligence (AI). A relatively small group of U.S. technology companies has benefited from investor enthusiasm, rising capital spending and strong earnings tied to AI infrastructure. AI is reshaping business, productivity and everyday life. It also is reshaping many portfolios—sometimes without investors realizing it.

When a small group of companies drives a large share of market gains, broad indexes can become more concentrated. A portfolio that once felt diversified may now be more heavily tilted toward U.S. equities, large technology companies or a single market theme. That does not mean investors should avoid U.S. stocks or dismiss AI’s long-term potential. It does mean they should understand the risks they are taking.

One way to address concentration risk is to revisit diversification, and international equities could play a role.

For much of the past decade, U.S. stocks outpaced most overseas markets, supported by strong earnings growth, deep capital markets and highly profitable technology companies. International markets have followed a different path, most with less direct exposure to the AI boom. In Europe and Japan, valuations look more reasonable and earnings are improving.

Emerging markets also might offer higher long-term growth potential, especially in parts of Asia connected to technology supply chains, consumer growth and manufacturing, though they can be more volatile and affected by currencies, politics and trade.

Years of strong stock market performance also can create a false sense of comfort, making it easy to forget how much stock prices can fluctuate. Volatility can return quickly. AI may continue to drive innovation and returns, but even powerful trends can face setbacks.

Conversely, we’ve seen elevated bond volatility in recent years, especially in 2022–23 and again in 2026 as the Fed has been raising interest rates. Bonds still can be an important diversifier in your portfolio and currently offer the most attractive yields we’ve seen in decades. If the economy were to slow, perhaps due to a downturn in AI investment, stocks would likely suffer, but high-quality bonds could benefit from a decline in interest rates.

A financial advisor can help you review your allocation, rebalance thoughtfully and decide whether international exposure or an increase in fixed income fits your goals. Diversification does not guarantee a profit or protect against loss, but it can help align your investments with something more durable than recent performance: your long-term financial purpose.

David Royal is executive vice president and chief financial & investment officer at Thrivent.