2 minutes 55 seconds
Christine Kashkari: Joe, you've said AI might be the next general-purpose technology similar to electricity and telephone that transforms industries and society.
At this point in time, where are we in the AI J curve and what should investors be thinking of as this moves forward?
Joe Davis: Yeah, Christine, you know, thanks for the question. It's, you know, I'm really proud of the fact that, you know, we collected more data on technology over the past 150 years than any organization to my knowledge in the world. And we looked at the investment cycle and what, what I was surprised to find is that there's two phases to investment cycle during a period of technological change.
And in the first phase, I would argue we're in that phase now with AI, is the producers of AI could be computer chips, could be the the software great, could be great companies, public and private, delivering the technology. (Graphic insert: Tech producers make big gains in first phase) That's whose prices tend to ascend the most. We saw that with the internal combustion engine, locomotives, electricity, personal computer.
What I was surprised to find is that the investment opportunity set changes so much so that I call it the great rotation when it happens for three reasons. And what what the cycle is, is companies outside of tech outperform in the back half.
You know there is tends to be a little bit of an over investment in the first cycle. Those companies, although they're growing very quickly, you know, they don't benefit as much as the second-half versus the rest of the economy. You have to understand this is a general-purpose technology. It's making all companies in the economy way more efficient, not just those in Silicon Valley.
So there's a good convergence of non-tech companies through profitability. (Graphic insert: Non-tech firms catch up) The second reason is you have a lot of new entrants in the tech space. That happened with the automobile, it happened with in these other past cycles. And so there's a lot of what's all creative destruction, there's failure rates. So there's still a great company survive, but that brings down the ROI or the return of the technology basket.
(Graphic insert: General-purpose technology disrupts its own industry) And the third one and I think we're seeing it play out is that you have the general-purpose technology disrupts its own industry the most and that is clear in our research. And so, it was hardware versus software in the late 90s. It was energy changing, energy consumption with electricity. It was the automobile affecting railroad profitability because trucking now changed transportation of goods.
And so we could very well see this with AI. Some companies do very well. You have software companies under pressure. And so as a basket, you just get volatility there.
I get excited about the opportunities that can emerge in the second-half of the investment cycle, which may sound counterintuitive, which is actually yet is very consistent with how technology transforms the economy and how it can open up the investment landscape in our portfolios.
In times of rapid technological change, markets often fixate on the immediate—headlines, hype, and the next big breakthrough. The bigger story is what unfolds over the long term as adoption spreads and market leadership shifts. In this Better Vantage video, Vanguard Global Chief Economist Joe Davis speaks with Christine Kashkari, editorial director of WSJ Custom Programming and cohost of the Better Vantage by Vanguard podcast series, about what AI could mean for markets and why volatility may be part of the path.
Davis draws on 150 years of technology history to highlight a familiar pattern: Early gains often concentrate among the builders—the companies supplying foundational tools, chips, and platforms. But as adoption broadens, a quieter transition begins—what Davis calls the “great rotation.” Value can move toward the adopters—firms across health care, manufacturing, finance, and logistics using AI to improve efficiency, reduce costs, and support sustainable growth. That’s where opportunities can begin to emerge.
Watch the video for more on why investment opportunities can evolve over time, even as the technology trend remains intact.
Notes:
- All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss.
- This content was created by Custom Content from WSJ, a unit of The Wall Street Journal Advertising Department.