T. Rowe Price fund manager Peter Bates betting on an AI-led US productivity boom
Baltimore-based fund manager Peter Bates turned a contrarian bet on US stocks into a winning strategy, as markets surged from their April lows.
Peter Bates backed US shares when many others were running.
Six months later, the S&P 500 has bounced 37 per cent from its low point and global stocks have followed. The Baltimore fund manager’s contrarian bet is paying off.
His Global Select Equity Strategy beat an 11 per cent rise in the benchmark MSCI World Index in the three months to June 30. Since inception in 2020, his fund has returned 11.9 per cent a year, on average.
While investors fled US stocks in April amid fears that tariffs would cause economic meltdown, the T. Rowe Price portfolio manager doubled down on his conviction in the US economy’s fundamentals.
As well as stronger than expected earnings growth and the restart of interest rate cuts in the US, Bates sees growing evidence that artificial intelligence is supercharging US productivity.
“Earlier in the year, there was definitely a narrative that you need to run from the US stockmarket and tariffs are going to be terrible. Exceptionalism is over,” he says.
“Fast forward six months, and tariffs are largely implemented, we aren’t seeing massive inflation and we’ve had a very strong recovery in the stockmarket.”
The S&P 500 index delivered 12 per cent earnings growth in the June quarter, more than double the 5 per cent that analysts forecast. What gave Bates the conviction to hold firm when others were panicking? His belief in “the long-term dynamic nature of the American economy”.
“Even if tariffs would have been really bad, we have massive capacity to cut interest rates, and American balance sheets are strong,” he says. “If you think on a three-year view, there’s tremendous growth opportunities in the American economy.”
AI productivity surge
At the heart of Bates’ optimism is evidence that artificial intelligence is already boosting productivity across the US economy. Labour productivity growth has accelerated from around 1.5 per cent in the decade before Covid-19 to about 2 per cent since the launch of ChatGPT.
This productivity boost is helping to cool wage inflation without triggering mass unemployment.
A key metric that previously showed 3 million more job openings than available workers is now in balance, even as unemployment remains low at around 4.3 per cent.
“I think that is a direct reflection of AI productivity,” Bates says.
“People worry about mass lay-offs with AI, but I think over time, as people get more productive using technology, certain jobs are going to require fewer people, creating freedom for those people to go do different things that add value to the economy.”
Coiled spring economy
Much of the broader US economy remains subdued. Manufacturing has been contracting for two and a half years, while housing, commercial construction and freight volumes all show weakness.
Bates sees a “coiled spring” waiting to be released once uncertainty around trade policy is solved. “Corporate America is waiting for the dust to settle, to determine what the new rule book is,” he says. “Once that dust settles, they will begin investing for the future. And that future is very bright because it does involve reshoring.”
The fund manager expects this pent-up investment demand to drive stronger economic growth. If productivity continues at 2.5 per cent annually, combined with modest population growth, real GDP could expand at 3 per cent – well above the 2 per cent rate of recent decades.
“If you’re talking nominal GDP growth of five to six per cent, you’re talking earnings growth of 10 per cent, maybe higher,” Bates says.
“Then all of a sudden, the stockmarket doesn’t look so expensive at 22 times earnings.”
Selective approach
Bates’s concentrated portfolio of 30-40 companies deliberately underweights the Magnificent Seven technology giants that have dominated Wall Street gains.
“Two or three years ago, before AI really existed, the Magnificent Seven looked impenetrable,” Bates says. “AI is breaking down some of those moats.”
He points to potential disruption in Google’s search business as users increasingly turn to AI chatbots for information, and Amazon’s e-commerce dominance being challenged as AI directs shoppers to other platforms.
Instead, he favours companies positioned to benefit from the eventual industrial recovery, including steel manufacturer Steel Dynamics and freight company Old Dominion. These stocks have lagged this year but could deliver strong gains when the broader economy accelerates.
Watching for inflation
The main risk to Bates’s optimistic scenario is that rapid economic growth could reignite inflation, forcing central banks to raise interest rates again.
“If we’re in Q2 2026 and GDP growth is six per cent, and we get inflation readings north of three per cent, then you start thinking, maybe the Fed needs to raise rates,” he warns.
However, he believes AI-driven productivity gains could help suppress wage inflation, keeping the economy in a “Goldilocks” zone of solid growth without excessive price pressures.
For now, he remains confident in his contrarian mindset.
“I think we could enter a decade that is the AI productivity boom,” he says, drawing parallels to the internet-driven expansion of the 1990s.
Peter Bates is a portfolio manager at T. Rowe Price, which manages more than $US1.73 trillion ($2.6 trillion) in assets globally.
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