First wave of investment in generative artificial intelligence has concentrated on the build-out of data centers’ capacity to enable the evolution of the new technology. Looking ahead to the useful use of artificial intelligence, Joe Davis, global chief economist at Vanguard, anticipates the new technology will “emerge in sectors outside of tech – healthcare, finance, manufacturing, etc. – driving increases in growth and productivity across the economy generally.”
Davis remarked in a recent Q&A that although tech stocks are “very highly valued” and most of the potential from artificial intelligence has already been factored in to that group, his team’s analysis “does not suggest that you should overweight tech stocks.”
He continued, “If an investor is looking to take advantage of the growth predicted by the evolution of AI, the first order of business is to overweight the broad equity market,” meaning the U.S. stock market since “that’s where the strength of the growth will likely be, given the vibrant source of innovation that the U.S. economy has been and seems likely to be.”
Holding shares of an index fund, such the SPDR S&P 500 ETF Trust SPY, which replicates the large-cap benchmark S&P 500 SPX by aggregating all of its components, is one approach to acquire broad exposure to the U.S. stock market. Given that the S&P 500 is weighted by market capitalization, this exposes you extensively to Big Tech. Comprising 27.8% of the exchange-traded fund’s portfolio, the top five businesses owned by SPY – Nvidia Corp. (NVDA), Apple Inc. (AAPL), Microsoft Corp. (MSFT), Amazon.com Inc. (AMZN) and the Class A and Class C shares of Alphabet Inc. (GOOGL) – GOOG.
One can diversify from the S&P 500 in a lot of ways. One could own Invesco S&P 500 Equivalent Weight ETF RSP shares. Another, says Davis, is to adopt an even more index-fund strategy. Designed to follow the whole American market, the Vanguard Total Stock Market ETF VTI is one example.
But suppose you wish to own some specific stocks outside of the technology industry?
Nontechnical stock screens
One may contend that the S&P 500 has truly three tech sectors. Out of the Magnificent Seven stocks that have dominated the U.S. market over the past two years, only three – Nvidia, Apple, and Microsoft – fall inside the information technology sector. Alphabet and Meta Platforms Inc. (META) are in the consumer discretionary category; Amazon and Tesla Inc. (TSLA) belong in the communications services sector.
We started with the S&P 500 for a nontechnical screen and omitted those three sectors. We next split the remaining list among stocks having majority buy or equivalent ratings among analysts employed by broker’s companies or investment-research organizations surveyed by FactSet.
Next we examined the analysts’ consensus projections for yearly income from 2024 through 2026. For firms whose fiscal years don’t line up with the calendar, we used calendar-year estimates as modified by FactSet. Company sales for the whole S&P 500 should rise at a weighted compound annual growth rate of 6% from 2024 through 2026.
You might need to scroll to the right to see all the data.
The table also includes the share of buy or equivalent ratings among analysts and consensus price targets. Keep in mind that the Wall Street tradition is for analysts to set 12-month price targets. That might be considered a short period for a committed long-term investor.
Before investing in any individual stock, you should do your own research to form your own opinion about the company’s business strategy and how likely it is to remain competitive over the next decade. One way to begin that process is to click on the tickers for more information.
