Vanguard, the asset management giant overseeing $11.9 trillion, has released a contrarian investment outlook that challenges the current AI-driven tech stock frenzy. In its 2026 outlook report, the firm identifies US value stocks and non-US developed market stocks as the two most attractive equity investments for the next five to ten years, projecting annual returns of 7% and 6% respectively.
While these sectors aren’t traditionally considered AI plays, Vanguard argues they represent a strategic opportunity to capitalize on AI adoption without the inflated valuations currently plaguing the technology sector. The firm believes these investments “offer much more attractive valuations and have yet to fully price in the potential long-term benefits of AI adoption.”
Vanguard’s thesis centers on AI diffusion across the broader economy. As artificial intelligence technology spreads beyond pure-tech companies, value-oriented sectors including industrials, financials, and select consumer segments are positioned to realize significant efficiency gains and earnings growth. These traditional sectors could benefit from AI implementation while trading at more reasonable valuations than high-flying tech stocks.
The firm also suggests these investments could serve as hedges against an AI bubble burst. While Vanguard stopped short of declaring an outright AI bubble, it warned that “risks are growing amid this exuberance” in technology stocks. The report identifies potential threats including new competitors emerging to challenge current AI leaders and massive AI infrastructure capital expenditures cutting into corporate earnings.
Market data suggests this rotation may already be underway. Over the past month, the Vanguard S&P 500 Value ETF (VOOV) gained 2.7% and the Vanguard FTSE Developed Markets ETF (VEA) rose 1.6%, while the Vanguard Information Technology Index Fund ETF (VGT) declined 1.4%. More dramatically, non-US developed market stocks—spanning the UK, Japan, France, Germany, Australia, South Korea, and Switzerland—have surged 30.3% in 2025, crushing the S&P 500’s 15% gain.
Vanguard estimates the AI investment cycle is only 30%-40% complete, suggesting continued growth ahead, but cautions that concentration risk in tech stocks warrants diversification into undervalued sectors poised to benefit from AI’s broader economic impact.
Key Quotes
Both segments offer much more attractive valuations and have yet to fully price in the potential long-term benefits of AI adoption
Vanguard’s report explains why value stocks and non-US developed markets represent superior risk-adjusted opportunities compared to high-flying tech stocks, despite not being traditional AI investments.
As AI diffuses across all sectors of the economy, value-oriented sectors such as industrials, financials, and select consumer segments may be better positioned to realize efficiency gains and grow earnings, making them potentially more attractive in the medium term
This statement articulates Vanguard’s core thesis that AI’s economic benefits will spread beyond technology companies to traditional sectors that can leverage the technology for operational improvements.
In 2026, U.S. technology stocks could well maintain their momentum given the rate of investment and anticipated earnings growth. But let us be clear: Risks are growing amid this exuberance, even if it appears ‘rational’ by some metrics
Vanguard issues a measured warning about technology stock valuations, acknowledging continued potential while cautioning that risk levels are escalating despite seemingly justified valuations.
Our Take
Vanguard’s contrarian stance reflects a sophisticated understanding of AI’s economic lifecycle. While markets have rewarded AI infrastructure builders and model developers, the firm recognizes that sustainable value creation ultimately comes from productivity gains across the economy. This mirrors historical technology adoption patterns—early infrastructure investments create hype and volatility, but lasting returns come from widespread implementation. The 30.3% outperformance of international developed markets in 2025 suggests this rotation is already materializing. Investors should consider that AI democratization through accessible tools and APIs means competitive advantages may erode for pure-tech plays while expanding for companies that effectively deploy AI. Vanguard’s positioning also provides downside protection—if AI disappoints, value stocks offer fundamental support that high-multiple tech stocks lack. This represents prudent portfolio rebalancing for the AI era’s next phase.
Why This Matters
This analysis from one of the world’s largest asset managers represents a significant shift in thinking about AI investment strategy. Rather than chasing high-valuation AI pure-plays, Vanguard is advocating for exposure to traditional sectors that will benefit from AI adoption without the premium pricing.
The implications are profound for both institutional and retail investors who have poured capital into technology stocks. If Vanguard’s thesis proves correct, the real AI winners over the next decade may not be the companies building AI systems, but rather those implementing AI to drive operational efficiency and earnings growth.
This perspective also highlights growing concerns about AI investment sustainability. With tech stocks trading at elevated multiples and massive capital expenditures required for AI infrastructure, the risk-reward profile may be shifting. For businesses, this signals that AI value creation will increasingly come from practical implementation across industries rather than pure technology development. The report suggests a maturation of the AI investment cycle, where benefits diffuse throughout the economy rather than concentrating in a handful of tech giants.