Billionaire Warns The Coming AI Shockwave Could Reshape The Market

Blackstone President Jonathan Gray warns that investors are underestimating AI's disruptive power, which could bifurcate industries and lead to significant capital misallocation. Consequently, Blackstone is strategically avoiding AI-vulnerable businesses and investing in AI-resistant sectors such as utilities, energy, and data infrastructure. This outlook suggests the S&P 500 faces risks from potential widespread disruption, despite containing AI beneficiaries, making specific infrastructure plays like energy midstream (e.g., Oneok) and data infrastructure (e.g., Blue Owl Capital) attractive due to anticipated AI-driven demand and current valuations, amidst a cautiously bearish view on the broader market.

Analysis

Jonathan Gray, President of Blackstone (BX), warns investors against complacency regarding AI's disruptive potential, forecasting a sharp bifurcation where rules-based industries like legal and accounting face significant destruction. Blackstone is actively integrating AI impact into its deal analysis, recognizing the technology's capacity to enhance productivity by 25-60 basis points in total factor productivity and 40-90 basis points in labor productivity over the next decade, while simultaneously causing substantial legacy business destruction and potential capital misallocation. This dual impact necessitates a re-evaluation of traditional investment theses.

Blackstone's strategic response involves avoiding businesses vulnerable to AI disruption, instead leaning into AI-resistant sectors such as utilities (XLU), energy (XLE), and data infrastructure. The firm cautions that seemingly cheap, disruption-prone industries could become value traps, drawing parallels to mall REITs post-e-commerce disruption. This perspective suggests a cautious outlook on broad market indices like the S&P 500 (SPY), which contains both AI beneficiaries (e.g., NVDA, MSFT) and potential losers.

The analysis advocates for avoiding large indices due to rich valuations and uncertain disruption, favoring undervalued infrastructure plays. Energy infrastructure, specifically midstream assets like Oneok (OKE), is highlighted for benefiting from growing natural gas demand from data centers, offering stable contracted cash flows and an attractive dividend yield (over 6% for OKE). Data infrastructure, exemplified by Blue Owl Capital (OWL) with its strong growth momentum and digital infrastructure backlog, also presents significant opportunities in an AI-dominated future.

Key Decisions for Investors

• Re-evaluate portfolio exposures for AI vulnerability, particularly in rules-based or easily replicated industries, and consider increasing allocation to AI-resistant sectors like utilities, energy, and data infrastructure.
• Exercise caution with broad market index funds (e.g., SPY) and potential value traps, as AI disruption could lead to significant multiple contraction for vulnerable companies despite current low valuations.
• Explore specific infrastructure investments, such as energy midstream (e.g., OKE for its yield and data center demand) and digital infrastructure (e.g., OWL for growth and backlog), which are positioned to benefit from AI-driven demand.