The S&P 500 includes hundreds of stocks, yet a handful of AI-linked companies drive its returns. The Bloomberg US Aggregate, the benchmark for the US investment-grade bond market, contains thousands of securities, but it is now largely tied to interest rates, and AI borrowers account for more than half of this year’s net investment-grade issuance.¹

Investors may be taking on risks they never intended, obscured by portfolios that appear diversified on the surface.

Here are seven numbers that show where hidden risk may be building in portfolios, and how they potentially can be mitigated:

Backdrop: The market began 2026 expecting two rate cuts. Instead, persistent inflation, a resilient economy and a strong labor market led the Fed to hike in September. And as of October 30, markets priced about a 73% probability of a 25-basis-point hike in December, with one full hike cumulatively priced in by January 2027.² Long-duration bonds have taken the brunt of it. In the third quarter, the Bloomberg US Aggregate Bond Index fell 3.5%, its steepest quarterly drop since 2022. With investment-grade spreads near historical tights, public bond investors are being compensated mostly for rate exposure, not credit risk.

Allocation Implication: As rates rise, long-duration public bonds are under pressure. Private credit, which spans more than corporate loans, can offer less interest rate sensitivity:

• Floating-rate senior secured loans, such as those in direct lending, have coupons that periodically reset, so income can rise as rates do in this higher-for-longer environment.
• Asset-backed finance is secured by cash-flow-generating assets and can be less rate-sensitive than public corporate fixed income. It amortizes through cash flows over the financing’s life, rather than relying on a single payment at maturity.
• Manager selection matters: floating-rate strategies differ widely in capital structure position, sector exposure and leverage.

Backdrop: The Shiller CAPE P/E ratio, which compares prices with 10 years of inflation-adjusted earnings, is at 40.2x, within striking distance of its dot-com peak and far above its 30-year average of 28.9x.³ Stocks now offer a yield that’s lower than bonds: investors can currently earn about 6% from Baa-rated corporate bonds versus 5.4% from the S&P 500’s forward earnings yield, underscoring the valuation challenges facing public equities,⁴ which can be volatile.

Allocation Implication: With value increasingly hard to find in public equity, private equity and hybrid strategies can offer different sources of return:

• Many private equity strategies emphasize operational value creation, disciplined entry prices and businesses with durable cash flows.
• Buyout-backed companies have grown EBITDA about 9% to 13% every quarter since late 2022, while public companies have posted 0% to 10% growth.⁵
• Over rolling 10-year periods, private equity has outperformed the S&P 500 in 99 of the last 100 quarters, through December 31, 2025.⁶
• Historically, similar highs, different lows: buyout private equity and public equities each reached about 18% annualized returns over 10 years at best, but at worst buyout returned about 9% and public equities about -2%.⁷
• Hybrid strategies, which invest between senior debt and preferred, structured and common equity, pursue equity-like returns with credit-like downside protection, a potentially more measured way to stay invested at current valuations.

Backdrop: The 10 largest stocks, including Nvidia, Microsoft and Apple, have contributed about 57% of the S&P 500’s return this year.⁸ They make up about 39% of the index, more than double their weight from a decade ago.⁹ That concentration undermines the diversification that the hundreds of holdings are supposed to provide.

Allocation Implication: Private equity can add diversification by broadening exposure:

• Private equity can complement public equities by providing access to a differentiated set of companies and opportunities beyond the public markets.
• More than 80% of US companies with more than $100 million in annual revenue are private, and private markets can offer access to many of them.¹⁰
• Private equity secondaries can offer access to seasoned portfolios, diversified across managers, vintages, sectors and hundreds of companies, with a shorter J-curve and distributions that may begin sooner.

Backdrop: The bull case for hyperscalers rests on a consensus assumption: that their operating cash flow more than triples, from about $600 billion in 2025 to $2 trillion by 2030.¹¹ If it falls short or the timeline changes, the equity AI trade could weaken, and credit spreads could widen out.

Allocation Implication: If hyperscaler cash flow is missed or delayed, credit tied to the same trade could reprice, and spreads on new deals could widen. For investors concerned about credit tied to the AI buildout, asset-backed finance can offer a different set of protections:

• Collateral and seniority: lenders can structure financing around tangible assets, with seniority and other contractual protections that can reduce reliance on a single company’s growth or refinancing conditions.
• Contractual cash flows: payments follow loan terms and the performance of underlying assets, not equity valuations.
• Shorter duration: shorter-dated and amortizing structures return principal sooner, leaving less of the investment exposed to wider spreads.

Backdrop: The composition of the Bloomberg US Aggregate, the index many investors treat as the core of a portfolio, has changed significantly. Treasuries are now about 46% of it, up roughly 20 percentage points in 20 years, versus about 24% for corporates.¹² With credit spreads near historical lows, core bond portfolios remain heavily exposed to interest rate movements, with relatively limited additional compensation for taking credit risk.

Allocation Implication: Private investment-grade corporate credit can offer an alternative source of core income, with more return coming from spread:

• Access to a broader, potentially more differentiated opportunity set through proprietary origination, without moving down in credit quality.
• Negotiated covenants, collateral packages and defined payment waterfalls that can support downside protection relative to unsecured corporate credit at comparable ratings.
• Ratings from the same agencies that rate public credit, with some structures offering daily liquidity.

Backdrop: The investment-grade bond market, long viewed as a portfolio stabilizer, is being reshaped by the AI buildout. Hyperscalers have issued more than $248 billion of investment-grade debt through August, more than double 2025’s $108 billion,¹³ and AI-related issuance as a whole totals $332 billion, more than half of net investment-grade supply.¹⁴ A bond portfolio’s traditionally safe core may be increasingly a bet on AI.

Allocation Implication: As AI-related issuance becomes a larger source of exposure within public credit indices, private credit can offer a broader set of borrowers and collateral:

• Private investment-grade credit is typically sourced through proprietary channels, with negotiated terms.
• Asset-backed finance spans collateral such as vehicles, aircraft and equipment, so exposure isn’t always tied to the largest index issuers.

Backdrop: For decades, bonds have often helped cushion stock declines, which is why the 60/40 portfolio worked. But in 2022, stocks and bonds fell together. The 36-month rolling correlation between US stocks and bonds peaked near 0.7 in 2024, the highest since at least 1980, and remains about 0.5.¹⁵

Allocation Implication: Investors looking beyond public markets can consider private markets’ differentiated return drivers:

• Private infrastructure may offer defensive characteristics during market stress and protection against inflation, with low correlation to other major asset classes (0.34 to US stocks, -0.12 to US bonds). Private real estate may offer diversification and inflation mitigation, with low correlation to public markets (0.17 to US stocks, -0.23 to US bonds).¹⁶
• Hybrid strategies aim to improve return per unit of risk, with the flexibility to invest across credit and equity, which may help diversify a portfolio.

Note: Yields for bond indices are yield to worst; Treasury yields are yield to maturity. “Premium over 3-month Treasury” is the difference in yield and includes compensation for both credit and duration (interest rate) risk. Spreads are option-adjusted spreads over Treasuries. For the S&P 500 row, the spread and 30-year average compare the earnings yield with the Baa corporate yield, not Treasuries. Source: Bloomberg, as of October 30, 2026. The 30-year averages use month-end data from October 1996 through October 30, 2026.