The next wave of AI investing may look very different

Man thinking with an office background

The next wave of AI investing may look very different

Expert Perspective

 | 

October 20, 2026

 

Champion surfers often appear to have a sixth sense for waves. While the pack is focused on the wave already breaking, elite surfers are studying currents, wind patterns, and the energy of the ocean to anticipate the next opportunity.

Investing during periods of technological change requires a similar mindset.

Today's market is understandably focused on artificial intelligence. But many advisors and investors are concentrating on what's working now without considering how short-lived that might be and what might be next.  The key question for advisors isn't whether AI will change the economy; it's which companies will ultimately capture the value in the future.

Riding the current wave of the AI trade

An interesting dichotomy has emerged in the markets today. Rather than being driven by a single dynamic, we see markets chasing fear and FOMO simultaneously. On one side, many are piling into the hyperscalers and companies benefiting from the buildout of AI infrastructure. On the other, concerns about inflation, geopolitics, and stretched valuations have driven interest in commodities, alternative investments, and ultrashort fixed income as a way to manage risk.

Many advisors have joined the chase, increasing exposure to growth stocks and more than doubling allocations to semiconductors over the past five years while favoring shorter-duration fixed income and alternative investments.1

Looking beyond AI’s builders to the beneficiaries

AI may prove to be the next transformational general-purpose technology. That's certainly the foundation of our economists' long-term outlook. But don’t confuse AI's economic promise with market returns—especially for the small group of today's AI hyperscalers.

History offers an important lesson—from railroads and electricity to automobiles and personal computers, the companies that pioneered a technology often benefited first. Yet they didn't always create the most value for investors over the long run. Vanguard's research suggests that the biggest beneficiaries tend to emerge later and from unexpected places.

 

Figure 1: What history suggests about transformative technologies

Bar chart titled "What history suggests about transformative technologies." The chart compares annualized returns during two phases, "GPT emerging" and "GPT spreading," across Market and Value-growth categories. For the Market category, annualized returns are approximately 6.2% when GPT is emerging and 4.2% when GPT is spreading. For the Value-growth category, annualized returns are approximately 2.9% when GPT is emerging and 6.6% when GPT is spreading. The chart suggests broader market outperformance during the emergence phase of transformative technologies, while value-growth outperforms during the adoption and spreading phase. Sources: Vanguard calculations using Yale School of Management and Ken French Data Library data as of March 31, 2026.

Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

Sources: Vanguard calculations, based on data from the Yale School of Management and the Ken French Data Library, as of March 31, 2026.

Notes: Equity returns are analyzed across historical general-purpose technology (GPT) cycles using a regime-based framework. Each quarter from 1900 to 2023 is classified into one of three regimes—GPT emerging, GPT spreading, or other—based on the behavior of three megatrend variables: transformation, efficiency, and augmentation. These variables are calculated by the Vanguard Megatrends model. A GPT emerging period is identified when the transformation variable is rising, signaling the early adoption and deployment of a new GPT. A GPT-spreading period is identified when transformation momentum has peaked, but efficiency and augmentation continue to improve, reflecting broader diffusion across the economy. Regime classification is based on average changes in these variables over the prior five years. Market refers to Fama-French market factors and value-growth returns refer to Fama-French value factors. Industry concentration is calculated as the Herfindahl-Hirschman Index (HHI) of the Fama-French 12 industries.

We believe many of the long-term beneficiaries of AI may be companies that leverage it to improve productivity; grow revenues; and create new products, services, and possibly new industries.

Consider health care, financial services, and other parts of the value sector of the market as areas where we see this new technology making an impact. With labor shortages in health care, AI can help replace administrative tasks and give medical professionals more time to spend on direct patient care. In financial services, insurance companies can use AI to detect and reduce insurance fraud. Over time, the benefits may show up not in headlines about technological breakthroughs but in stronger profit margins, higher productivity, and faster earnings growth.

 

Figure 2: AI may help narrow the gap between value and growth

Bar chart titled "AI may help narrow the gap between value and growth." The chart compares the 10-year annualized change for value and growth stocks across four financial metrics: return on equity (ROE), profit margin, asset turnover, and leverage. ROE is similar for both groups at approximately 6%. Growth stocks show a significantly larger increase in profit margin, about 7.2%, compared with value stocks at about 1.6%. Value stocks show a larger increase in asset turnover, about 4.8%, compared with growth stocks at about 1.4%. Both groups show declining leverage, with growth stocks decreasing more than value stocks. A highlighted section over the profit margin category notes that AI may raise margins through lower operating expenses, such as selling, general, and administrative (SG&A) costs. The chart suggests AI-driven efficiency gains could help value companies improve profitability and narrow the performance gap with growth companies. Source: Vanguard calculations based on Bloomberg data as of June 30, 2026. Notes indicate value is represented by the MSCI USA Value Index and growth by the MSCI USA Growth Index.

Sources: Vanguard calculations, based on data from Bloomberg, as of June 30, 2026.

Notes: Value is represented by the MSCI USA Value Index and growth is the MSCI USA Growth Index.

While we don’t know for sure when the tide will turn, we are watching for productivity and earnings growth in the value-oriented portions of the market today. Value may offer exposure to the long-term opportunity associated with adoption of AI while potentially providing a smoother ride through periods of market uncertainty.

The case for diversification

So, what are the best ways to gain exposure to the winners of tomorrow? For most advisors, the answer starts with diversification. A broadly diversified portfolio can help capture future winners during periods of technological change while providing flexibility to direct new dollars toward areas that may benefit most from AI-driven productivity gains.

NVIDIA provides a useful example—following the collapse of the tech bubble, it entered the S&P 500 index as a relatively small company known for graphics chips used in gaming PCs and high-end computers used by engineers. Few could have predicted the role it would play decades later in the AI revolution. By having exposure to the broad market, an investor who had placed $100,000 in the S&P 500 at the start of 2003, following the collapse of the tech bubble, had about $25 in NVIDIA. Over the next 20 years, that $25 grew to more than $60,000.2

Investors didn't need to know exactly where the wave would form. By owning the broad market, they benefited from NVIDIA's success long before its potential became obvious. That's one of diversification's greatest strengths: It can provide exposure to future winners before their potential becomes widely recognized.

Broad diversification can serve as the foundation of an AI-aware portfolio. From there, advisors can consider whether incremental dollars should be directed toward areas they believe may benefit most from broader AI adoption.

 

For advisors, our view isn't about abandoning the stocks that have lifted client portfolios to record highs over the past few years; it's about where the next incremental dollar should go. So, if you are trying to emphasize our AI view in client portfolios, consider directing new money toward value stocks, or even targeting some of the most promising sectors using AI, such as health care and financials.

Rachel Aguirre headshot

Rachel Aguirre

Head of Product and Portfolio Strategy

 

Positioning for AI adoption

When most advisors think about positioning client portfolios for the success of AI, they usually think about growth stocks, technology companies, and AI infrastructure. But, focusing  on the users instead of the innovators leads you away from the pack.

Health care, financials, and value stocks are among the areas we see as long-term beneficiaries if AI proves transformative. And if AI disappoints, they may offer greater resilience if AI-related expectations ultimately prove too optimistic.

For advisors, our view isn't about abandoning the stocks that have lifted client portfolios to record highs over the past few years; it's about where the next incremental dollar should go. So, if you are trying to emphasize our AI view in client portfolios, consider directing new money toward value stocks, or even targeting some of the most promising sectors using AI, such as health care and financials.

 

Watching the horizon

Today's market is focused on the builders of AI infrastructure. History suggests that some of the largest beneficiaries may be the companies that learn to use AI most effectively to improve productivity, expand margins, and create new products and services.

For advisors, that creates both an opportunity and a challenge. The future winners may not be the companies dominating headlines today.

By maintaining broad diversification and thoughtfully allocating new dollars toward areas where AI's productivity gains may ultimately emerge, advisors can position clients not only for the current phase of AI, but for the ones that follow.

Like the best surfers, investors don't need to predict exactly where the next wave will form. They simply need to be positioned to catch it when it does.

More Vanguard analysis

For additional expert insights, check out:

  • Advisor trends: Find out how your portfolios stack up in comparison with your advisor peers'.
  • Market perspectives: Turn to Vanguard's senior economists each month for projected returns and monthly economic highlights on inflation, growth, and expected Fed actions.
  • Active Fixed Income Perspectives: View our quarterly, in-depth commentary for a sector-by-sector analysis and a summary of how those views affect the Vanguard active bond funds.

Investment products

Explore Vanguard funds and ETFs.

 

1 Vanguard and Morningstar, Inc., as of June 30, 2026.

2 Vanguard calculations, based on data from FactSet, as of June 30, 2026.

 

Notes:

  • Past performance is no guarantee of future results.
  • All investing is subject to risk, including possible loss of principal. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Diversification does not ensure a profit or protect against a loss.
  • Vanguard is not responsible for determining what's in the best interest of any underlying client on whose behalf you use this information. As an investment advisor, it remains your responsibility to make a best-interest determination for your clients, so you should review carefully the information presented and the fund's prospectus for more complete information regarding any fees, expenses, investment objectives, and risks, and make your own determination as to its appropriateness before you rely on it.
  • Funds that concentrate on a relatively narrow market sector face the risk of higher share-price volatility.
  • CFA® is a registered trademark owned by the CFA Institute.

This article is listed under