As my colleague Kenneth Lamont recently wrote, artificial intelligence is the “defining investment theme of our era.” The most well-known beneficiary is Nvidia NVDA, which became the world’s first $4 trillion company by enabling the technology. Less obvious winners include Vertiv VRT, an industrial business that supplies AI data centers.
But ever since ChatGPT burst onto the scene nearly three years ago, traditional growth stocks have captured most of the market spoils. Morningstar’s broad US growth index has outperformed its value counterpart by a wide margin since late 2022. That’s not to say value hasn’t had moments. During pullbacks in the fourth quarter of 2024 and from February through April 2025, value stocks held up best. When AI enthusiasm resumed, however, growth pulled ahead.
Will the value side of the market ever make a sustained run? Growth stock dominance in the US really goes back more than 10 years—well before AI enthusiasm took hold (internationally, it’s a different story). Periods of value resurgence, like 2016 and 2022, look like aberrations in retrospect. Value investors can be forgiven for capitulating.
It’s worth remembering, though, that change is the only constant in markets. The stocks, sectors, and styles that triumphed in the past are rarely future leaders. Turning points are only obvious in retrospect.
Catalysts for market rotations are also hard to identify in advance. That’s why I was struck by the prediction Vanguard chief economist Joe Davis made during a recent interview on Morningstar’s The Long View podcast. Davis thinks AI is likely to boost economic growth and thinks its stock market impact will be greatest on the value side of the market. “[I]f you’re the most bullish on AI, you actually want to invest outside of the Mag 7 and technology sphere, because it’s going to be that transformational. I’m not picking on those companies at all. I’m talking about the second half of the chessboard.”
I asked him to elaborate.
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Lefkovitz: Joe, you made a comment earlier, I wanted to come back to, about value stocks and how they might be a surprise winner from AI. Wondering if you could lay that out a little bit more.
Davis: This was a surprise. I didn’t know this, and it’s not infallible like the motions of the tide, the ocean. If the tides are going out, they’re definitely coming back in. But I think the odds are tilted that way. And what was a surprise to me is that there are stylistically, so very loosely, there’s two phases to a technology cycle. First of all, you have to know that you’re actually in a transformative technology cycle. Like, did I know in 1992 that a personal computer—I know now a personal computer was transformative, but did I really know in 1992? Probably not. Our system, our data-driven framework, gives you a modest sense, but with uncertainty in real time, in 1992, because of the signals it picks up. Today, it says we’re certainly likely to be in this extended technology cycle, which means there’s a general-purpose technology likely to emerge.
Now, in periods when they happen—I wish we had hundreds of those examples. Dan, we just don’t. You have electricity, you have a combustion engine. And people, even economists, debate what a general-purpose technology is. Just because we use something a lot doesn’t mean it lifted everyone and fundamentally changed society. Like the microwave oven, it’s a new technology. It’s not a general-purpose technology. However, we are in that, and our odds are more likely than not that AI is a general-purpose technology. What happens is there’s, what I was surprised to find is that there’s two phases to the technology cycle. The first phase is what I call just the production of the technology is starting to spread. There’s a massive investment in the space. A lot of new businesses are formed trying to produce the technology. It was in the personal computer. It was hardware, software, and the dial-up internet. I’ll use that as an example because it makes it tangible.
And some will say, Oh, there’s a bubble that emerges. I don’t know. I mean, yes, generally enough, I don’t want to make that claim. And that’s really almost immaterial to the second half. What emerges in the second half of the investment cycle is what was surprising to me and gets to your question, Dan. And if this technology is that transformational as we think it is, it starts to benefit companies through higher earnings, to productivity, to new products with that technology as a platform. I’ll give you two examples.
In the personal computer, now I know with the benefit of hindsight, things such as online shopping, companies that sell it all, I don’t know, books and music ended up being 4% of the company—I’m trying not to use company names, but you can think of like the jungle, Amazon AMZN emerged. But that was not technically a technology company by the true letter of the law. It was a consumer staple. With electricity, guess what powered the assembly line? Well, two winners emerged. They were called Ford Motor Company F and General Motors GM. Now, electricity didn’t lead to their profitability, but without those disruptive technologies, I don’t think we’re talking about those companies today. It’s spread to sectors outside of electricity on the one hand and computers on the other. But that’s how technology works. And if it’s not that transformative, then it hasn’t lifted growth; then it’s a dud to begin with.
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That’s what was surprising to me is that if we play out—and you have to give this five or seven years, and again, the irony is that outside of the tech sector, parts of those investing universes don’t have the multiples that say the Magnificent Seven (Alphabet, Amazon.com, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla) or the technology stocks do have. And I’m not saying they’re not delivering value. I just said that this AI has the likelihood of being as transformative as a personal computer. That’s pretty high praise. But what it says is that if it is truly this transformational, other opportunities emerge, and that’s where it pushes you at the margin, given the multiples outside of value and outside of the United States. It’s not being skeptical of technology. Quite the contrary. It’s actually saying, no, if this thing has legs, then it’s going to spider web into outside of Silicon Valley.