'AI is going to give the economy a boost': strategist

Key Concepts

• GDP Growth: Anticipated growth driven by investment spending, particularly in the US, with benefits for Canada.
• AI Investment Cycle: A significant $2.1 trillion commitment by AI hyperscalers through 2027, likened to past major capital build-out cycles (post-WWII autos, 70s/80s oil exploration).
• Market Valuations: Current market valuations are considered stretched, with risk concentrated in a few firms (the “Magnificent Seven”).
• Megatrends: Long-term factors (globalization, demographics, debt, AI) impacting the economy.
• Investment Strategy: Focus on US value, developed US stocks, and Canadian credit within fixed income.
• AI Diffusion: The process of AI technology spreading from its originators to various sectors (healthcare, manufacturing, education) to boost productivity.

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Economic Outlook for Canada & the US in 2024/2026

Ashish Dewan, Senior Investment Strategist at Vanguard Canada, presents an optimistic outlook for the Canadian and US economies in the coming years, characterized by resilience and opportunity. He anticipates GDP growth, particularly fueled by investment spending in the US, while acknowledging potential risks in market valuations.

GDP Growth & Investment Spending

Dewan believes the US will provide a significant boost to the economy through substantial investment spending. Specifically, AI hyperscalers have committed to investing $2.1 trillion through 2027. He draws parallels to past major capital build-out cycles, such as the post-World War II automotive industry and the oil exploration boom of the 1970s and 80s, suggesting this cycle is in its early stages – currently estimated to be in year three of an eight-year investment build-out, with only 20-40% completion. This investment is expected to drive GDP growth, benefiting Canada as a result.

Megatrends & Influential Factors

Beyond investment, Dewan highlights several influential factors shaping the economic landscape in 2026: monetary policy, fiscal policy, and broader megatrends. These megatrends include globalization, demographics, debt levels, and, crucially, artificial intelligence (AI). He emphasizes that these are slow-moving, supply-side factors with a profound impact on the economy.

Market Risks & Valuations

Despite the optimistic GDP outlook, Dewan cautions that markets may be “pricing in too much perfection.” He identifies key risks:

• Stretched Valuations: Current market valuations are considered high.
• Concentrated Risk: A significant portion of the market’s value is concentrated in a small number of companies. The top ten firms in the S&P 500 now represent 40% of the index.
• AI Disappointment: If AI fails to deliver on expectations, these stretched valuations could unwind, potentially leading to a market correction. He suggests a scenario where AI “plateauing at a lower plane.”

AI: Phases of Impact & Productivity Gains

Dewan outlines a two-phase impact of AI:

• Phase One (Current): Benefits primarily accrue to the “builders” – the companies directly involved in AI development (referred to as the “Magnificent Seven”).
• Phase Two (Future): AI will diffuse across various sectors, including healthcare, manufacturing, and education, leading to significant productivity gains. This broader dissemination is expected to boost sectors outside of the initial technology originators.

He explicitly distinguishes this AI cycle from the dot-com bubble of the late 1990s, noting that many current companies have good free cash flow and strong balance sheets. He acknowledges the market is somewhat overvalued based on Vanguard’s Capital Markets Model, but suggests that if earnings growth of 10-15% materializes, the market could be fairly valued. However, this relies heavily on AI delivering as expected.

Investment Strategy Recommendations

Based on this analysis, Dewan recommends the following investment strategies:

• US Value Stocks: Investing in undervalued US companies.
• Developed US Stocks: Focusing on established US companies.
• Canadian Credit: Investing in Canadian fixed income, specifically credit instruments.

Logical Connections & Synthesis

The discussion logically progresses from a broad economic outlook (GDP growth) to the specific drivers of that growth (investment spending, AI). It then addresses potential risks (market valuations, AI disappointment) and concludes with actionable investment recommendations. The emphasis throughout is on a nuanced perspective – acknowledging both opportunities and potential pitfalls. The comparison to past investment cycles provides historical context and reinforces the idea that the current AI-driven investment is substantial and likely to continue for several years.

Quote: “We actually think that, you know, the market is a little bit overvalued right now. But if you look at kind of some of the consensus estimates of earnings growth, which are about 10 to 15%, and if those do actually materialise, we we do think that the market could be fairly valued.” – Ashish Dewan, Vanguard Canada.

This analysis suggests a cautiously optimistic outlook for the Canadian and US economies, with a focus on long-term growth driven by AI and investment, but tempered by awareness of market risks and the need for realistic expectations regarding AI’s impact.