Why the Next Winners in the AI Boom May Not Be AI Stocks

Vanguard Chief Economist Joe Davis posits that the long-term beneficiaries of the AI boom are likely to be value stocks, not just the current leading AI technology companies. He argues that truly transformative technologies, like AI, have two phases: an initial investment in production, followed by a broader application phase where the technology acts as a general-purpose tool, significantly boosting productivity and earnings across diverse non-tech sectors. This perspective suggests a potential market rotation over the next 5-7 years, where value stocks, currently trading at lower multiples, could see substantial gains as AI's impact 'spider webs' beyond the tech sphere, akin to how electricity powered industrial giants or personal computers enabled new business models.

Analysis

Vanguard Chief Economist Joe Davis presents a contrarian, long-term thesis arguing that the ultimate beneficiaries of the artificial intelligence boom will be value-oriented stocks, not the current technology leaders. This perspective is based on a historical two-phase model of transformative technology cycles. The first phase, currently underway, involves massive investment in the production of the technology, which has fueled the significant outperformance of growth stocks over value since late 2022. The second, more profound phase, which Davis suggests may unfold over the next five to seven years, occurs when AI becomes a general-purpose technology adopted across the broader economy. This adoption is expected to drive productivity, new product development, and earnings growth in non-tech sectors, similar to how electricity enabled industrial giants like Ford and General Motors or the personal computer paved the way for consumer-facing businesses like Amazon. The core of the argument is that as AI's impact 'spider webs' beyond Silicon Valley, the greatest investment opportunities will emerge in companies outside the high-multiple 'Magnificent Seven' where the transformative potential of AI is not yet reflected in valuations.

Key Decisions for Investors

• Investors with a long-term horizon should consider initiating or increasing allocations to value stocks in sectors poised to leverage AI for significant productivity gains, looking beyond the current concentration in technology.
• It is crucial to perform due diligence on non-tech companies to identify those with credible strategies for integrating AI into their core operations, as these are the most likely second-wave beneficiaries of the technology cycle.
• Given the stated five-to-seven-year timeframe for this potential market rotation, investors should exercise patience and not abandon growth exposure entirely, as the first phase of the AI boom may still have momentum.
• Consider screening for opportunities in attractively valued companies, both domestically and internationally, where the market has not yet priced in the potential for AI-driven operational enhancements and earnings growth.