Business Insider Joe Davis, Vanguard's global chief economist, says it's time to start positioning for a transition from AI infrastructure stocks to AI beneficiaries.
- Joe Davis of Vanguard warns AI infrastructure stocks may not offer long-term growth.
- Instead, the unlocked value may lie in eventual AI users, Davis said.
- He highlighted three investment plays that could outperform whether AI stumbles or keeps booming.
How much juice is left for investors to squeeze out of the AI buildout? That's a question that Joe Davis, Vanguard's global chief economist, is grappling with.
Even accounting for some recent stumbles, hyperscalers and AI hardware makers have seen stellar gains over the last few years. Davis thinks the aggressive spending will continue for another year or two, but he's concerned that it's already priced in.
While popular AI stocks may continue surge in the near-term, Davis warns that the upside won't last, and that it's the AI users that will eventually begin to unlock value and earnings growth. "History offers a clear lesson here," Davis wrote in a June report for Project Syndicate republished by Vanguard. "The companies building transformative technologies rarely capture the greatest long-term value. Instead, those benefits accrue to the users."
"Electricity created more wealth for manufacturers that could run assembly lines around the clock than for power utilities. The automobile enriched suburban developers and retailers more than the automakers themselves," he continued. "AI may well reproduce this pattern."
That said, Davis said it's time to start positioning for a transition from AI infrastructure stocks to AI beneficiaries.
He highlighted three trades with attractive "risk-return profiles" to play this transition for the next five to 10 years: Value-oriented US stocks, non-US developed markets, and high-quality fixed income.
As examples of the types of firms in these categories who stand to benefit from AI, he pointed to healthcare providers, financial and business services firms, which could automate tasks and offer more personalized services.
"The point is not to abandon technology exposure or try to time the market. It is to recognize that in an AI-transformed world, we will have moved from the current phase, where AI builders dominate, to one where AI users should increasingly command attention," he wrote. "It happens every time a great technology transforms the world."
Not only are these trades well-positioned to get a boost from AI use if the technology lives up to its potential, but they can also act as defensive investments in case the AI trade falters and investors flee from growth stocks, Davis said.
Examples of funds that offer exposure to these trades include the iShares Core S&P US Value ETF (IUSV), the Schwab International Equity ETF (SCHF), and the Vanguard Total Bond Market ETF (BND).
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