While AI continues to eat up the bulk of investor capital, some allocators — particularly endowments and foundations — are beginning to slow their roll and look outside the boom for opportunities.

Even as global AI spending is projected to rise 44 percent this year to $2.52 trillion, enthusiasm among allocators is waning amid soaring valuations, an overcrowded (and vaguely defined) sector, and geopolitical uncertainty.

"I need a non-AI-story to stay excited," said Leena Bhutta, chief investment officer for the Doris Duke Foundation. "Looking in other lanes right now seems more interesting."

While the New York-based charitable foundation has exposure to data centers and companies focusing on large language models, Bhutta told Institutional Investor that the priority for Doris Duke’s $2.2 billion portfolio this year is “to add capital that is not correlated to the AI cycle.” This means investing in areas that haven't seen "stratospheric valuations," including emerging markets, European credit, and Japan value equities.

Other allocators voice similar concerns about how concentrated the trade has become. According to Chris Scibelli, managing director at ACR Alpine Capital Research, while AI has lifted public equities, the theme has not helped private equity of late — and may not be holding up stocks that much longer, either.

“The AI rally saved the doldrums of public equities for the past couple of years. But not private equity," Scibelli said. "And you could argue that even public markets are starting to struggle without low interest rates. Most allocators are forecasting a future filled with suboptimal equity returns."

Geopolitics has also diverted investor attention from AI. While AI remains a major focus for investors and managers globally, geopolitical uncertainty has now eclipsed the technology as the sector's top concern, with the recent Global Asset Management Survey from II showing that over three quarters of investors cite geopolitics as the greatest risk facing the industry over the next decade.

Brian Neale, chief investment officer for the $2.3 billion University of Nebraska Foundation, wondered if the S&P 500 is entirely “being propped up by AI” as markets continue to brush off geopolitical events.

“If you told me a week or two into the liberation of Venezuela that the market reaction would be a pretty positive couple of days, that would not be my base case,” Neale said.

“One Bad Earnings Report Away from a Massive Correction”

Endowment investors are also seeking opportunities outside AI as they brace for a possible drawdown. “The AI story is priced to perfection,” Neale said before adding: “We're one bad Mag7 earnings report away from a massive price correction."

An endowment allocator with nearly $5 billion in assets believes the largest tech stocks such as Nvidia and Alphabet could lose 10 to more than 20 percent.

"Currently, the spend is not justified by the revenues [AI] is generating," they said, adding that the top five tech stocks could suffer a 10 to 20 percent drop in value later this year. (The university's endowment is underweight tech and AI.)

However, that doesn't mean the university allocator thinks investors should reduce their exposure or that AI is an overhyped bubble. "There will be bumps along the way," they said. "But if you stay through these 10, 20, 30 percent corrections, you may find some amazing value."

Not everyone thinks a recession is imminent.

“It’s certainly not on my BINGO card,” Neale said. “Now is not the time to be rushing to the exits on growth assets.”

To Scibelli it’s simply “a reversion to the mean” when it comes to U.S. markets.