Investment giant Vanguard suggests investors should favour beaten-down value stocks, whether artificial intelligence transforms the economy or fails to deliver on its promises, according to the firm’s global chief economist.
Joseph Davis outlined the investment strategy in his new book ‘Coming Into View: How A.I. and Other Megatrends Will Shape Your Investments’ whilst presenting Vanguard’s proprietary economic model, reports The New York Times.
The asset management company’s analysis identifies two primary scenarios for the coming decade. Vanguard estimates a 45 to 50 per cent probability that AI and related technologies will revolutionise productivity, transforming work practices and driving faster economic growth.
Alternatively, the firm assigns a 35 to 45 per cent chance that AI will prove disappointing, failing to counteract negative economic trends, including rising fiscal deficits and demographic challenges from ageing populations.
Vanguard’s modelling projects starkly different returns depending on which scenario unfolds. In the optimistic “AI transforms” outcome, the S&P 500 would generate 9.8 per cent annualised returns from 2026 through 2035, compared to 3.9 per cent for ten-year Treasury bonds.
Under the pessimistic “deficits dominate” scenario, bonds would outperform equities with 6.5 per cent returns versus just 2.3 per cent for the S&P 500.
Divergent paths
Despite these divergent paths, Davis recommends value stocks in both scenarios. These typically include banks, utilities, consumer goods companies, energy firms, and some healthcare companies, which are currently trading below their perceived intrinsic worth.
In the transformational AI scenario, Davis argues that productivity gains would spread throughout the economy, potentially benefiting undervalued companies more than current high-flying technology stocks whose valuations already reflect AI optimism.
“You don’t have to pick sides, you don’t have to be a hero,” Davis stated, suggesting classic diversification combined with value stock positioning can protect portfolios regardless of AI’s ultimate impact.
Under the pessimistic scenario, value stocks would benefit as growth stock valuations decline when AI fails to justify current market expectations.
Davis drew parallels to the early twentieth-century industrial transformation of electricity, where widespread adoption created new industries and improved manufacturing efficiency beyond the initial technology companies.
The economist’s analysis comes as technology stocks continue to command premium valuations, partly based on expectations of AI advancements, while traditional value stocks remain relatively underpriced.
