Joe Davis anticipates a shift from growth stockss to their value counterparts even as artificial intelligence starts to become pervasive in the economy.
Joe Davis, chief global economist and head of asset allocation, Vanguard
cation Joe Davis, anticipate a shift from growth stocks to their value counterparts even as artificial intelligence starts to become pervasive in the economy.
In a new book entitled Coming Into View, Davis describes a dynamic clash between two megatrends, AI and America’ s unsustainable budget deficits. He acknowledges it’ s too early to determine if one megatrend will override the other, but he offers several possible scenarios. Potential outcomes range from an AI-led productivity revolution that boosts value stocks while helping resolve America’ s budget shortfalls, in a similar fashion to what tech did in the 1990s. Another possible scenario is a debt crisis featuring 7 % to 9 % Treasury yields, though he assigns that a low probability.
Some trends that are ubiquitous today have been building for longer than many investors think. The deglobalization movement now dominating the global economy first gained public attention with Brexit in 2016. But it began right after the 2008-2009 financial crisis when nations started looking inward.
Today, deglobalization fever is probably near a peak as the U. S. economy experiences a supply shock and the rest of the world sees a demand shock, according to T. Rowe Price chief U. S. economist Blerina Uruci and chief European economist Tomasz Wieladek. In their view, tariffs are likely to hit the world’ s two biggest economies, the U. S. and China, the hardest.
In the firm’ s midyear outlook, they say it’ s possible tariffs could hit both U. S. consumer spending and certain business’ s profit margins. Moreover, if the U. S. dollar continues to decline, it could rekindle inflation here. China also faces challenges, though it is fighting a trade war only with the U. S.— while America is taking on most of its own trading partners.
Despite a well-deserved reputation for slow growth and socialist policies, Europe has certain attractions. For example, China views the U. S. trade war as an opportunity to unload products shut out of America into Europe at discount prices and steal market share on the Continent.
That could be deflationary for the eurozone. But President Trump’ s continual questioning of America’ s commitment to NATO at a time when Russia has invaded Ukraine has prompted European countries to redouble their defense policies for the first time in memory.
Europe’ s most dramatic reversal has taken place in the continent’ s dominant economy, Germany, which has traditionally maintained severe fiscal austerity and a passive military. The nation’ s legacy of hyperinflation and militarism caused it to refuse to engage in deficit financing or major defense spending, one reason its peacetime, industrial economy thrived in the post-World War II era.
Following the election of Friedrich Merz as chancellor earlier this year, Germany announced it would spend an additional 500 billion euros on defense and a similar amount on stimulus infrastructure. German stocks have bounced back after a lackluster performance for the last decade.
For financial advisors allocating client portfolios, the outperformance of U. S. equities for more than a decade creates a dilemma. Most clients have done very well investing at home and view Europe more as a vacation destination. At the same time, investors who dislike expensive stocks can’ t help but notice that the components of European indexes closely mirror those of U. S. domestic value— energy companies, financials and utilities.
Even in the value space, investors face a choice. Among energy companies, Exxon is clearly a superior business to France’ s Total, but it is selling at twice the price-earnings multiple.
American stocks are“ expensive” and have“ less margin of safety,” notes Jasmine Yu, chief investment officer of Bryn Mawr Trust Advisors.“ You need to be selective and nimble.”
As of late June, Bryn Mawr’ s equity portfolios had managed gains in the 6 % to 7 % range, as most had one-third of their assets invested in foreign equities that were up about 10 %. The firm also benefited from lightening up on U. S. tech shares early in the year reinvesting the proceeds elsewhere during the second quarter.
For her part, Yu remains skeptical of Europe with its excessive regulations and generally tries to stay country-neutral.“ You want to be in financially strong growth companies that can take market share” and be“ cognizant of valuation,” she says.
The asset allocation team at T. Rowe Price shares Yu’ s concern about valuation but adopts a slightly different approach to weighting, according to Charles Shriver, co-chair of the firm’ s asset allocation committee. In the U. S., the asset manager has a modest tilt toward value and likes the energy, materials and financial sectors. However, he adds that value itself is“ expensive” when compared with its historical levels.
If one examines the returns on equity( ROE) in growth versus value, Shriver acknowledges that growth warrants a premium due to profitability. Looking at the Russell 1000 Growth Index, the ROE is 23.6 %, compared with 11.9 % for the Russell 1000 Value Index.
One sector that T. Rowe Price’ s alloca-
16 | FINANCIAL ADVISOR MAGAZINE | JULY / AUGUST 2025 WWW. FA-MAG. COM