Episode summary
We Asked Vanguard's Chief Economist Why AI Has Two Huge Tails — And Which One Wins
Excess Returns
· · Guests: Joe Davis
Summary
Joe Davis argues that AI may be a general purpose technology large enough to lift U.S. growth above consensus, but only if it does more than automate existing work. He says Vanguard’s framework treats technology, demographics, fiscal deficits, and globalization as competing forces, and that AI is currently the dominant offset to aging populations and high debt. In his view, the big question is whether AI becomes broad-based augmentation and new industry creation, or just a productivity tool that mainly saves time.
He says the market is still in an early buildout phase, more like 1996 or 1997 than a late-cycle bubble, even though great technologies eventually produce major stock drawdowns. That means near-term momentum could remain strong, especially in large-cap U.S. growth, while the longer-term beneficiaries may broaden beyond tech into healthcare, financial services, education, and other service industries. Davis also argues that tariffs and oil shocks matter, but are currently being offset by AI-related investment.
For portfolio construction, he thinks 60/40 remains viable, but investors should think in scenarios rather than headlines. If AI disappoints and only automates, he sees more fiscal pressure, higher rates, and greater equity drawdown risk, which would favor shorter-duration fixed income and more defensive positioning.
Key takeaways
- Joe Davis says Vanguard’s baseline is that AI will transform the economy enough to lift growth above consensus, not just automate tasks.
- He thinks the market is still in the buildout phase, roughly analogous to 1996-1997, even though major technology cycles eventually suffer sharp stock drawdowns.
- Davis expects the next wave of AI winners to expand beyond tech into healthcare, financial services, education, and other service businesses.
- He argues that tariffs and oil shocks have mattered less recently because AI investment has been a powerful offset to growth headwinds.
- If AI only automates and fails to create new industries, Davis expects fiscal deficits and bond-market pressure to become much more important over time.
Notable quotes
“There has never been a great technology that has not had a significant draw down in stock prices”
“Our projections are AI is going to is going to affect 80% of the occupations at twice the rate of the personal computer in four years”
“I would say you know our projections are AI is going to is going to affect 80% of the occupations at twice the rate of the personal computer in four years”
“the biggest beneficiaries are the users users are adopters of technology that have unmet need”
“Put as much money in as you can and let it do the hard work for you”
How the episode opens
There has never been a great technology that has not had a significant draw down in stock prices, which is code word for saying what some would say there's a a bubble forms. We're having economic growth projections that are 50% above the consensus. Our projections are AI is going to is going to affect 80% of the occupations at twice the rate of the personal computer in four years.
The personal computer took 15. either the trend for growth is going material higher because of because of the innovation of AI uh that overcomes the demographics and the debt levels we have that is by far our most likely outcome. Um but if it if if it only if if AI only manifests along certain techn if it only automates which means it has not become a general purpose technology we use it all but it's it's like the farm tractor um that would be disappointing and then that sets into motion this eventually not not today not tomorrow but you get fiscal pressures because they're already high.
You're watching Excess Returns, the channel that makes complex investing ideas simple enough to actually use, where better questions lead to better decisions. I'm Matt Ziggler. Justin Carbono is co-hosting with me today our guest, global chief economist and global head of the investment strategy group at Vanguard, down the street from me in Pennsylvania, author of the 2025 bestseller, coming into view, how AI and other mega trends will shape your investments.
Joe Davis, welcome to Excess Returns.
Ah, thanks for having me. Pleasure to be here. I was telling you before we started recording, it's worth saying it. If you haven't seen a copy of this book, make sure you check it out. I think of the books that my team at Sunpoint or Raa like all held up and said, "This is really really cool.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- ai as general purpose technology
- megatrends and market returns
- ai automation vs augmentation vs new industry
- ai impact on growth inflation rates
- implications for portfolio construction
Companies and tickers mentioned
- Vanguard
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Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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