Q&A: Vanguard Forecasts AI to Drive Strong Economic Growth
Discussions among financial advisors are focused on flexibility and leverage. That the market is in an artificial intelligence bubbleexecutives at Vanguard have some reassuring news.
The company forecasts US GDP growth of 2.3% in 2026 and 3% growth in 2027, driven largely by continued evolution and investment in AI technology. Vanguard researchers estimate that this investment activity may continue for another year or two.
That said, the head of product and portfolio strategy, financial advisory services, at Vanguard, Advisors, admits that in addition to being excited about the potential opportunities, advisors are currently fearful of the market’s overvaluation. Wealth management He spoke with Aguirre about strategies advisors can use to reconcile these conflicting perspectives and how Vanguard is addressing their needs.
This Q&A has been edited for length, style and clarity.
Wealth Management: What we’re hearing from CIOs at financial advisory firms is that stock market valuations are too high, particularly in the technology and AI sectors, and there’s widespread concern that we’re in a bubble. But Vanguard seems to have a different view. Can you talk about what’s behind the company’s positive outlook?
Rachel AguirreWe are in a very exciting time in the markets right now. You often see markets driven by fear or greed. We are in the moment where the two are driving. Many investors are coming to us to understand where the investment opportunities are; Especially in the AI business, we’re seeing them chase higher returns. On the other hand, depending on the day, investors are also very cautious about the uncertainty in the market. That could be a concern about rising interest rates; It often looks like a threat to overextended prices in equities. We see advisors trying to position their portfolios to hedge against volatility but also pursue perceived opportunities.
When looking at flows, year-to-date, US-listed ETFs have passed an incredible phase With $1 trillion in revenue year over year before summer gets here. A lot of it was in stocks, a lot of it was on AI. At the same time, however, if you Look at fixed income as a categoryThe fastest growing category in terms of flows is extremely short. They saw up to $64 billion a year. That brings to life how investors are caught between these two things—this FOMO and fear dynamic happening at the same time.
From a vanguard perspective, especially when we’re talking about AI, we think it’s important to step back, not miss the big picture of what’s happening, and maintain and maintain a long-term lens.
WM: What is Vanguard’s long-term vision on AI?
RaWhen you take a step back and look at the bigger picture, our level of belief around AI and the potential for change is increasing. We believe AI is poised to propel the US economy into one of its strongest periods of growth in years. for what Because this is not just about incremental growth; We believe that AI will ultimately transform productivity and open up new areas of innovation, new economic growth, and we are still in the early days of the construction and investment cycle in AI.
However, it’s important not to confuse AI’s economic promise with proven strong returns, especially for hyperscalers. Those are not equivalent. In fact, what we’ve learned from past and other GPT discoveries is that it’s rarely the innovators or developers of new technology that capture long-term value. Typically it’s the users.
From a consulting lens, it is now important to take a more strategic view. Finally, where does the opportunity go? We believe that it is in the companies and market segments that can use AI to improve productivity and increase their revenue through it or to create new products and services. Think healthcare, think financial institutions, Consider companies outside the United States. These are market value sectors, so we’re watching profit margins there, and we’re watching revenue growth as early indicators that AI productivity is starting to move through the economy.
Bottom line, as advisors wonder where to allocate their next incremental dollar, we believe there is real value beauty as a solution. It’s where we see both the long-term opportunity for AI and, in the short-term, insurance for what will likely be a bumpy road down the road.
WM: If the bubble pops, how much pain would there be in the market in your view?
Ra: At the end of the day, I come back to my point about diversity and the beauty of value solutions. Our belief is very high that AI will change the market. The beautiful thing about value is that long-term opportunity is ultimately where it’s going to lead.
But if AI turns out to be disappointing in any way, we’ll also see its price in the right place to be in the market.
WM: You mentioned the very strong ETF flows we’re seeing this year. he said. Research from AdvizorPro This suggests that as advisors continue to add ETFs to their portfolios, they are becoming more selective and strategic, and this is limiting growth opportunities for ETF issuers like Vanguard. How do you see this?
RaWe see very healthy, very strong ETF flows and growth from Vanguard’s perspective. But we are also seeing two (other) things. At Vanguard, we review thousands of advisor portfolios each year. One of the things we’re seeing now is that two-thirds of the advisory community is short-term, and 20% of advisors and their portfolios are two years or more short. So there is an opportunity for these advisors to take a more strategic view of fixed income because that landscape has changed dramatically. We are not in 2022 anymore; We have very high initial products that we work with. For example, in a principal-plus strategy, it holds a yield of more than 5% with a five-year duration. Here, even if you see one to two price increases, you’re still getting positive total returns.
We believe this means that advisors need to think strategically about their portfolios and make strategic allocations, especially in the fixed income portion of their portfolios. You can get more return for less risk, and in many cases lower cost.
WM: Can you add more color on where you see the best opportunities right now, both in equities and fixed income?
RaWe believe that fixed income is ripe with opportunities, and has a very central role to play in portfolios. We’re talking about how high-quality fixed income can provide advisors with the balls they need to balance their portfolios and build resilience. We see many opportunities in high-quality fixed income. We think Core-Plus is a very interesting market segment. The fixed income segment has really come back, we believe it’s a sustainable period for fixed income overall.
WM: You mentioned that one of the areas of equity that you find attractive right now is international equities. Is it broad based? Are there markets or sectors that are unique to you?
Ra: Broad-based developed and emerging markets. We feel it is important for investors to be properly positioned for that. We know that there is a meaningful home bias for US advisors. So, they’re not experiencing the full benefits of diversity globally, and that’s something we feel is important in the long term.
WM: In terms of larger market forces, what are your biggest concerns right now that could derail Vanguard’s more positive outlook?
RaWe have, although the probability is relatively low, the unfortunate case of AI. It will have implications for the economy, it will have implications for future returns and growth. And of course, the markets are in focus. Therefore, we believe that diversification is more important than ever, especially in the US equity markets. If you have exposure to the broader US equity markets, you’re seeing that we’re approaching half of those exposed to AI in one form or another. We believe that we are at a time when broad-based equity indices and diversification are more important than ever, with more AI exposure. Looking for value, look at companies outside the US to find that diversity in your portfolio.
WM: Your department works with mentors. What are asset managers like Vanguard hearing about right now in terms of issues they want to address? Which products are you most interested in?
RaAs the consulting business continues to grow, they seek strategic partners who can provide solutions within their portfolios and consulting practices. So, how do advisors focus on providing the most value to their clients? For some advisors, this will be financial planning coaching. We have our advisor’s alpha offering in that space.
And we’re also constantly interacting with consultants in terms of the solutions they’re looking for, whether that’s model portfolios, whether that’s custom model portfolios, or specific products.
It’s not just one thing. It depends on the consultant; It depends on their needs. However, the general impression is that advisors are looking for both personalized solutions for their clients and working at scale.
WM: We know that Vanguard has had discussions with a few different alternative asset managers over the past year about potential partnerships on products that combine public and private exposure. Are there any new developments on this front?
RaYou know Jack Bogle’s famous quote: “Don’t look for a needle in a haystack, just buy a haystack? Our view of the market continues to be “buy a haystack.”
WM: Can you give us more clarity on the metrics Vanguard is working on with regard to private-market partnerships?
RaI can tell you that our investment principles have not changed. They remain as they were. We seek sustainable investment value. Today we are looking closely at what is the unmet need of the investor, I would say especially with the private markets, there is a lot of misunderstanding. It’s an area that we continue to monitor closely, but of course, we don’t comment on any specific product in development.
