AI boom is a poor bet, world’s second-largest fund manager warns investors
Vanguard’s $16.5 trillion funds empire has declared that the Magnificent 7 tech stocks in the US are a ‘poor bet’ while championing one of the most boring investments on Wall Street.
The artificial intelligence investment boom may have years to run, but the world’s second-largest fund manager says investors should look beyond US tech giants for the best returns.
Vanguard, which manages about $US11 trillion ($16.5 trillion) for about 50 million investors globally, has a confronting message in its 2026 economic and market outlook: AI will likely transform the economy, but the so-called Magnificent 7 stocks are now are poor bet.
The investment giant says high-quality bonds, US value stocks and international sharemarkets offer far better prospects over the next five to 10 years.
It’s a counterintuitive call challenging the frenzy around AI stocks that has dominated markets.
But Vanguard global chief economist Joe Davis says the AI infrastructure build – while economically beneficial – carries growing risks for investors betting on today’s tech leaders.
“Despite the glamour of the tech-heavy US equity market, more compelling investment opportunities are emerging in high-quality fixed income, US value and ex-US equity – even for those investors most bullish on AI’s prospects,” Davis says.
The firm expects US stocks to deliver just 4 per cent to 5 per cent annual returns over the next decade, which is well below the double-digit gains investors have enjoyed in recent years and which many of the sell-side equity strategists predict for 2026.
Vanguard’s muted outlook is driven almost entirely by its concern about large technology companies, even as it foresees a 60 per cent chance that AI will help push US economic growth to 3 per cent in the coming years – a rate materially above most professional and central bank forecasts.
The disconnect stems from two key risks. First, the sheer scale of planned AI investment
which is about $US2.1 trillion through 2027, may not deliver the returns the market expects.
History shows that massive capital expenditure often produces disappointing profits as companies overextend themselves in an arms race.
Second, creative destruction looms. The companies building today’s AI infrastructure may not be tomorrow’s winners.
Vanguard believes many of today’s tech giants like Google, Amazon and Meta built their businesses on internet infrastructure created by giants that have since faded away.
Still, the AI investment cycle itself appears to be in early stages.
Vanguard’s analysis of past technology investments and projects from 19th century railroads to 1990s telecommunications suggests these waves typically peak over four to six years.
By that measure, AI spending is only 30 per cent to 40 per cent of where it could go.
“From the railroad in the 19th century to post-World War II industrial expansion to the internet and personal computer in the 1990s, the advent of a general-purpose technology has been followed by the economy engaging in capital deepening that requires significant upfront investment in the new tools,” Davis says. “We expect AI to be no exception.”
For the US economy, Vanguard foresees modest 2.25 per cent growth in 2026, held back by tariff effects and labour supply constraints. But the medium-term outlook is stronger, with AI investment supporting faster expansion once productivity gains broaden across industries.
Inflation will likely remain above 2 per cent through 2026, limiting the US Federal Reserve’s scope to cut interest rates below Vanguard’s estimated neutral rate of 3.5 per cent – a more hawkish view than the market’s current expectation that the Fed funds rate will hit 3.16 per cent in 2026.
A higher neutral rate forecast is why Vanguard likes bonds. The team expects high quality fixed-income delivering returns near current income levels providing a comfortable margin above inflation, regardless of what central banks do. Bonds also offer protection if AI disappoints and growth falters.
“Within fixed income, we stress the importance of quality in credit,” Davis says.
“While supply/demand mismatches could keep spreads tight, having tested historic levels many times in 2025 the prospect of further tightening is low.
“And this presents a one-sided risk profile to the downside, since current valuations offer limited compensation for risks associated with the AI investment cycle,” he says.
High-quality US bonds “provides diversification in light of the material downside risk in 2026 and beyond that an AI-driven productivity boost is not realised.”
Within equities, Vanguard favours value stocks and international stock markets, which trade at more attractive valuations and haven’t fully priced in AI’s potential benefits.
As AI diffuses across the economy, sectors like industrials and finance may see bigger efficiency gains than tech companies racing to build infrastructure.
“Economic transformations are often accompanied by such equity market shifts over the full technology cycle,” Davis says. The outlook isn’t without near-term optimism for tech.
Of course, US tech stocks could maintain momentum in 2026 on strong investment and earnings growth. But Vanguard says that risks are mounting amid the exuberance.
“Risks are growing amid this exuberance, even if it appears ‘rational’ by some metrics,” Davis says.
“More compelling investment opportunities are emerging elsewhere, even for those investors most bullish on AI’s prospects. Our conviction in this view is growing and it is informed by investment returns in previous technology cycles.”
For Australian investors, diversification matters more than ever.
AI promises to reshape the global economy, but the path to profits remains uncertain.
The safest bet may be spreading investments across bonds, value stocks and international markets, which is a decidedly unglamorous strategy in an age of AI hype.
It’s a reminder that transformative technologies don’t always translate into transformative returns for the companies building them. Sometimes the best investment during a gold rush is selling the “picks and shovels” – or better yet, staying diversified.
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