Vanguard model predicts AI has 45% chance to transform economy with vastly different stock returns

Vanguard’s global chief economist Joseph H. Davis has released new research suggesting that if artificial intelligence truly revolutionizes productivity, its benefits will extend beyond tech giants to traditional value stocks across all sectors. His proprietary model assigns a 45-50% probability to an “AI transforms” scenario where technological breakthroughs drive faster economic growth, compared to a 35-45% chance of disappointing AI adoption leading to economic stagnation.

What you should know: Vanguard’s economic model projects two drastically different investment landscapes over the next decade, with dramatically different asset class performance depending on AI’s actual impact.

• In the optimistic “AI transforms” scenario, the S&P 500 would deliver 9.8% annualized returns from 2026-2035, while 10-year Treasuries would return 3.9%.
• In the pessimistic “deficits dominate” world where AI disappoints, bonds would outperform with 6.5% returns versus just 2.3% for stocks during what Davis calls “a miserable decade for the stock market.”

The big picture: Rather than betting exclusively on AI winners, Davis advocates for a diversified approach that includes beaten-down value stocks, arguing that true AI revolution would benefit mundane companies and create entirely new industries.

Why this matters: The research challenges the conventional wisdom of concentrating investments in obvious AI beneficiaries, suggesting that broad diversification could protect investors regardless of which scenario unfolds.

• “You don’t have to pick sides, you don’t have to be a hero,” Davis explained, emphasizing that classic diversification strategies remain effective even in an AI-transformed world.
• The model specifically accounts for competing forces between technological advancement and demographic challenges like aging populations and rising fiscal deficits.

What they’re saying: Davis frames the uncertainty in stark terms about the economic future.

• “There are two paths, but only one’s going to play out,” he told The New York Times.
• His analysis suggests that artificial intelligence represents part of a broader “tug of war between artificial intelligence and an aging society” that will determine investment returns for the next decade.

Key details: The Vanguard model focuses on how AI adoption could fundamentally transform productivity across industries rather than just benefiting technology companies.

• Davis’s book “Coming Into View: How A.I. and Other Megatrends Will Shape Your Investments” takes a decades-long perspective on these economic shifts.
• The research specifically targets investors using broad index funds who hold only U.S. securities, providing tailored projections for this common investment approach.