This popular Vanguard S&P tracking vehicle remains an attractive buy.
The U.S. stock market has been on a remarkable bull run since October 2022, with popular Vanguard S&P 500 ETF (VOO 0.00%) It has risen an astounding 53.6% over that period. Initially driven by attractive valuations following the Federal Reserve’s interest rate hikes, this long rally has been fueled by generally favorable earnings and the transformative potential of the artificial intelligence (AI) revolution.
But some skeptics have expressed concern about the sustainability of this extended bull market. S&P 500‘s cyclically adjusted price-to-earnings ratio, or CAPE ratio, is currently about 34, more than double its historical average of about 16. This high valuation has some investors wondering whether the market is overheated and due for a correction.
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Investing in times of change
This superficial analysis fails to capture the profound impact AI will have on the global economy. By 2027, AI is expected to usher in a new era of advanced robotics, autonomous vehicles, and countless other groundbreaking innovations. Moreover, the pace of development is likely to accelerate even further with the emergence of autonomous AI researchers in the coming years.
As a result, the world in 2030 is likely to be a fundamentally different place, and relying on past precedents to guide investment decisions in this rapidly changing environment could prove costly. AI is predicted to add at least $17 trillion to the global economy, with more optimistic estimates putting it at over $100 trillion.
This transformative potential comes from AI’s ability to open up previously inaccessible markets in different sectors and industries, while simultaneously creating new market opportunities. The disruptive nature of AI will reshape the structure of our economy, undermining the usefulness of traditional metrics.
Want proof that AI isn’t hype?
A recent example of the rapid pace of AI innovation is the U.S. Air Force’s plans announced by Secretary of the Air Force Frank Kendall to field armed, AI-equipped F-16 aircraft by 2030. Ethical considerations aside, the U.S. military’s decision to fully embrace AI is a testament to the breakneck pace of progress in the field.
American companies are likely to follow suit. After all, companies that don’t incorporate AI into their workflows risk falling behind their competitors. More bluntly, this transformative technology will be necessary for most businesses to survive.
Key Takeaways
The Vanguard S&P 500 ETF is in a strange place: on the surface, it appears fundamentally and hugely overvalued, especially in a time of high interest rates, rising inflation, and a shortage of skilled labor in the US.
But AI will render most of these headwinds moot. Our Gutenberg moment of artificial general intelligence awaits us, but it may happen much sooner than most people expect. So you might want to reconsider staying on the sidelines.
To be sure, volatility will be a big factor in the near future as AI-driven disruption spreads and society struggles to adapt, but continuing to invest in top funds for large companies like the Vanguard S&P 500 should pay off handsomely over the next 20 years thanks to a boom in AI-driven innovation.
George Budwell invests in the Vanguard S&P 500 ETF. The Motley Fool invests in and recommends the Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
