Beyond the Hype: Why the Next Phase of AI Will Shape Long-Term Investment Returns

“The development of machinery is increasing at such a rapid pace that within a few years the unemployed will arise in revolt to take by force the necessities of life which they are no longer able to earn by their own efforts.”

Any guesses as to when that statement was made?

Given the rapid acceleration of artificial intelligence, would it seem out of place if it was said today?  Yet the line is from 1933.  To be fair, that year was arguably the worst year of the Great Depression.  Unemployment was nearly 25%, GDP had shrunk by almost a third, thousands of banks had failed, and the U.S. stock market was down almost 75% from its prior peak.

Today, the environment is very different. Unemployment is low, GDP is growing, the banking system is stable, and global asset prices are close to all-time highs.

Still, the sense of anxiety captured in the quote reflects an enduring concern – that technological advancement will outpace society’s ability to adapt.  AI’s potential to reshape the way we live and work has brought that feeling of unease back into sharp focus.  While we can’t say for certain what the ultimate impact of this new technology will be, history suggests that past innovations have led to far more prosperity than they’ve displaced.  What is economic growth after all, but a continuous cycle of new inventions, disruptions, and process improvements.  From the railroads to electricity to computers and the internet, each presented new and unique challenges.  But those challenges were overcome, and each eventually expanded opportunity rather than shrinking it.

From an investment perspective, this moment feels particularly notable.  The late 1990s were the last time we’ve seen this amount of capital flowing into a new technology.  In her book Technological Revolutions and Financial Capital, economist Carlota Perez outlines two main phases of technological revolutions – the Installation Period and the Deployment Period.  For the last three years, we’ve been firmly in the Installation Period, building the infrastructure of AI’s future.  It’s been a primary focus of investors, with many stocks and sectors directly involved in the buildout leading markets higher.

But going forward, the Deployment Period will be crucially important.  Broad adoption of a new technology across the economy is often where lasting value is created.  If AI is truly a long-term success, we ought to see the benefits accrued across a diverse group of businesses.  Remember, it wasn’t only the companies who laid the tracks for railroads or installed the fiber-optic cable for the internet who gained long-term value, it was also the numerous other businesses that were able to utilize that infrastructure.

Financial markets have performed very well over the past three years during the Installation Phase, but what’s in store for the future?  Can the strong returns continue?  Our CEO Philip Hamman uses a quote from Texas country singer Robert Earle Keene – “The road goes on forever, but the party never ends” – that I think is apt for the current environment.  The road is long, windy, and there will be bumps along the way, but there really is no “end” to the economy or investing.  We can’t know with certainty what the month-to-month or even year-to-year movements of the stock market will be, but we know investing is a long game.  And we believe that today’s innovations lead to tomorrow’s productivity and economic growth, which could potentially reward investors who stick to a disciplined, long-term strategy.