Q&A: Vanguard Forecasts AI to Drive Strong Economic Growth
As conversations among financial advisors increasingly focus on volatility and whether the market is in an artificial intelligence bubble, executives at Vanguard have some reassuring news.
The company forecasts 2.3% U.S. GDP growth in 2026 and 3% growth in 2027, largely driven by the continued evolution and investment in AI technology. Vanguard researchers estimate that this investment activity will likely last for another year or two.
That said, Rachel Aguirre, head of product and portfolio strategy, financial advisor services, at Vanguard, admits that, in addition to feeling excited about potential opportunities, advisors are also currently fearful of market overvaluation. Wealth Management spoke with Aguirre about the strategies advisors can use to juggle these conflicting outlooks and how Vanguard is addressing their needs.
This Q&A has been edited for length, style and clarity.
Wealth Management: What we are hearing from CIOs at financial advisory firms is that stock market valuations are too high, especially in the tech and AI sectors, which are overvalued, and there is widespread concern we are in a bubble. But it sounds like Vanguard has a different view. Can you talk about what’s behind the firm’s positive outlook?
Rachel Aguirre: We are in a pretty interesting moment right now in markets. Oftentimes, you see markets driven either by fear or by greed. We are in a moment right now where they are being driven by both. A lot of investors are coming to us wanting to understand where investment opportunities lie; we are seeing a lot of return chasing, particularly within the AI trade. On the other hand, depending on the day, investors are also very wary about the uncertainty in the markets. That might take the form of concern about interest rate hikes; it oftentimes takes the form of concern about very stretched valuations in equity. What we see are advisors trying to position their portfolios to protect against volatility, but also pursue the opportunities they perceive.
When you look at flows, year-to-date, U.S.-listed ETFs crossed an incredible milestone before the summer even got here in $1 trillion of inflows year-to-date. A lot of that was in equities, a lot of that was across AI. At the same time, though, if you take a look at fixed income as a category, the fastest-growing category in terms of flows has been ultra-short. They’ve seen $64 billion year-to-date. 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, we think it is very important to take a step back, not miss the big picture of what’s happening, and keep and maintain a longer-term lens, particularly as we talk about AI.
WM: What is Vanguard’s long-term view on AI?
RA: When you take a step back and look at the bigger picture, our conviction level around AI and its potential transformative impact is increasing. We believe AI is poised to propel the U.S. economy into one of its strongest growth periods in years. Why is that? It’s because this isn’t just about incremental growth; we believe AI is going to ultimately transform productivity and unlock new areas of innovation, new areas of economic growth, and we are still in the early days of the buildout and investment cycle in AI.
But, it is very important that we not confuse the economic promise of AI with guaranteed strong returns for the hyperscalers in particular. Those are not equivalent things. In fact, what we learned from the past and from other types of GPT breakthroughs, is that it’s rarely, if ever, the builders or developers of new technology that ultimately capture the long-term value. Typically, it’s the users.
From an advisory lens, taking a more strategic view right now is imperative. Where is the opportunity ultimately moving? We believe it’s in companies and portions of the market that could leverage AI to improve productivity and grow their revenue through it, or create new products and services. Think healthcare, think financial firms, think companies outside the United States. These are the value sectors of the market, so we are keeping an eye on profit margins there, and we are keeping an eye on earnings growth as early indicators that AI productivity is beginning to move through the economy.
Bottom line, as advisors are thinking about where to allocate their next incremental dollar, we believe there is real elegance to value as a solution. It’s both where we see the long-term AI opportunity and, in the shorter term, it’s insurance for what could be a bumpy road along the way.
WM: If the bubble does happen, how much pain might there be in the market, in your view?
RA: At the end of the day, I will go back to my point around diversification and the elegance of the value solution. Our confidence is very high that AI is going to transform the market. What’s elegant about value is that it’s where the opportunity long-term is ultimately going to move toward.
But should AI turn out to be disappointing in any way, we also see value as the right place to be in the market.
WM: You’ve mentioned the very strong ETF flows we are seeing this year. There is research from AdvizorPro that shows while advisors continue to add ETFs to their portfolios, they are being more selective and strategic, and that’s limiting growth opportunities for established ETF issuers like Vanguard. How are you addressing this?
RA: We see very healthy, very strong ETF flows and growth from a Vanguard perspective. But we are also seeing a couple of [other] things. Within Vanguard, we analyze thousands of advisor portfolios every year. One of the things we are seeing right now is that two-thirds of the advisor community is short duration, and almost 20% of those advisors and their portfolios are short by two years or more. So, there is an opportunity for this advisors to take a more strategic view of fixed income because that landscape has dramatically changed. We are not in 2022 any longer; we have much higher starting yields that we are working with. With, for example, a core-plus strategy, that’s carrying over about a 5% yield right with five years’ duration. Here, even if you see one to two rate hikes, you’d still be experiencing positive total returns.
We believe what that means is advisors are at a point when they can think about their portfolios strategically, and take a strategic allocation, particularly within the fixed-income portion of their portfolios. They can get more return for less risk, and lower cost in many cases.
WM: Can you add more color about where you see the best opportunities right now, both in equities and fixed income?
RA: We believe that fixed income is ripe with opportunities, and it also has a very central role that it plays within portfolios. We are talking about how high-quality fixed income can deliver the very ballast that advisors are looking for to balance their portfolios and build resilience. We see a lot of opportunity in high-quality fixed income. We think core-plus is a very interesting part of the market. The income portion of fixed income certainly is back, we believe it’s an enduring era for fixed income as a whole.
WM: You’ve mentioned that one of the equity areas you find attractive right now is international equities. Is it broad-based? Are there specific markets or sectors that stand out to you?
RA: It’s broad-based developed and emerging markets. We feel it’s important that investors are properly allocated to that. We do know for U.S. advisors there is a meaningful home bias. So, they are not experiencing the full benefits of diversification internationally, and that’s something we feel is very important long term.
WM: In terms of the larger market forces, what are you currently most concerned about that could disrupt Vanguard’s very positive outlook?
RA: We do have, while the probability is relatively low, a case in which AI disappoints. It would have implications for the economy, it would have implications for potential for future returns and growth. And, of course, markets are at an increasing level of concentration. So, we believe diversification matters more than ever, particularly within the U.S. equity markets. You are seeing that if you have exposure to broad-based U.S. equity markets, we are getting closer to half of that being exposed to AI in one form or another. We do believe we are at a point when you are getting a lot of AI exposure just through broad-based equity indexes and diversification is really important. It’s important to look at value, look at companies outside the U.S. to really get that diversification within the portfolio.
WM: Your department works with advisors. What are you hearing from them in terms of the issues they want asset managers like Vanguard to solve for them right now? What products are they most interested in?
RA: As the job of the advisor has gotten more demanding over time, they are looking for strategic partners who are providing solutions across their portfolios and across their advisor practices. So, we are focused on how can advisors provide the highest level of value to their clients? For some advisors, that’s going to be financial planning coaching. We have our Advisor’s Alpha offering in that space.
And we are also in constant contact with advisors in terms of the solutions they are looking for, whether that be model portfolios, whether that be custom model portfolios, or whether it be specific products.
It’s not just one thing. It depends on the advisor; it depends on their need. But, general commentary, advisors are looking for both personalized solutions for their clients and doing so at scale.
WM: We know that Vanguard held discussions last year with a few different alternative asset managers about potential partnerships on products for advisors that would combine public and private exposure. Are there any new developments on that front?
RA: You know Jack Bogle’s famous statement: “Don’t look for the needle in the haystack, just buy the haystack”? Our perspective on markets continues to be “Buy the haystack.” But when you think about the definition of the haystack, that is changing. That now includes private markets. That’s an area that we are studying very closely, we are looking at what investors needs are, how those needs are evolving, and we are going to be there to meet those needs where we uniquely can.
WM: Can you give us a clearer sense of the parameters within which Vanguard is working regarding potential private-market partnerships?
RA: What I would tell you is that our investment principles have not changed. They remain the same. We are looking for enduring investment merit. We are looking closely at what is the investor need that is not being met today, and I will say with private markets in particular, there are a lot of frictions involved. It’s an area we continue to explore and look at closely, but of course, we don’t comment on any specific product in development.
