Schroders' global head of equity investment and APAC head of sustainable development, Alex Tan, noted that the S&P 500 hit a fresh record high in August, buoyed by a strong earnings season and expectations that interest rate cuts could commence in the coming months. However, unlike the past six-plus months when artificial intelligence concept stocks dominated the market, this rally is no longer driven solely by AI names, with the advance broadening across various sectors and delivering a welcome improvement in market breadth.

This market shift also shines a spotlight on the dilemma currently facing investors. Some remain concerned about whether AI companies can ultimately justify their massive capital expenditures through future commercial monetisation of the technology. Another worry is that the valuations of many AI-related stocks already reflect fairly optimistic growth expectations, leaving them vulnerable to significant downside pressure should corporate results or development progress fall short of market hopes.

At the same time, recent market performance shows equities are not solely propelled by the AI theme, with the capacity to sustain strong returns visible in other areas as well. As such, the risk of being underweight equities is comparable to the risk of being overweight in any single theme. Over the long term, stocks also provide a degree of inflation protection that cash and certain other asset classes struggle to match.

For investors adopting a cautious stance on AI stocks, the more pertinent question is not whether to remain invested in equities, but rather which areas offer opportunities if the stock market continues to climb. From this perspective, a modest increase in allocations to value stocks may prove a sensible choice. These companies trade at valuations that are low relative to their earnings, cash flows or net asset values, and are largely scattered across market segments that have not benefited from the powerful AI boom in recent years.

The diversification advantages of value investing have become increasingly evident. In the three years to the end of June 2026, the correlation between the Morningstar global value stock fund category and the S&P 500 was significantly lower than that of its "blend" and "growth" counterparts. The allocation appeal of value assets has become even more pronounced lately. As investors expand their focus beyond a handful of leading companies to a broader range of names, the MSCI World Value Index has surged to become one of the strongest performing factor indices over the past two months.

However, investors should also recognise that not all value stocks are created equal. The MSCI World Value Index still holds a substantial weighting in technology stocks that have benefited from the AI boom, including semiconductor companies. For investors whose core objective is to diversify away from AI-related risks, a strategy leaning more toward "deep value" stocks may be worth considering, reducing dependence on the information technology sector.

It is worth emphasising that using value stocks as a diversification tool does not require investors to adopt a pessimistic view of the AI sector. The transformative impact of AI on productivity, corporate operations and the broader economy is plain to see. Yet even when a new technology ultimately fulfils its promised vision, market expectations and valuations tend to run ahead of reality. A well-balanced portfolio should be able to manage risk by avoiding excessive reliance on the most optimistic AI scenarios.