The U.S. stock market has been on a remarkable bull run since October 2022, with the popular Vanguard S&P 500 ETF (VOO 0.11%) gaining an eye-popping 53.6% over this period. This long-winded rally, initially sparked by attractive valuations following the Federal Reserve's interest-rate hikes, has been further fueled by generally positive earnings and the transformative potential of the artificial intelligence (AI) revolution.
However, some skeptics are raising concerns about the sustainability of this aging bull market. The S&P 500's cyclically adjusted price-to-earnings ratio (CAPE ratio) currently stands at approximately 34, more than double its historical average of around 16. This elevated valuation has led some investors to question whether the market is overheated and due for a correction.
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Investing in a world in transition
This superficial analysis fails to capture the profound impact that AI is poised to 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 could be further accelerated by the advent of autonomous AI researchers in a few short years.
As a result, the world of 2030 is likely to be a fundamentally different place, and relying on historical precedent to guide investing decisions in this rapidly evolving landscape could prove costly. AI is projected to add at least $17 trillion to the world economy, with more optimistic estimates coming in at over $100 trillion.
This transformative potential stems from AI's ability to break open previously inaccessible markets across sectors and industries while simultaneously creating new market opportunities. The disruptive nature of AI is set to reshape the fabric of our economy, undercutting the utility of traditional valuation metrics.
Want proof AI isn't a hype train?
A recent development that underscores the rapid pace of AI innovation is the U.S. Air Force's plan to deploy armed, AI-powered F-16 aircraft by 2030, as announced by Secretary Frank Kendall. Setting aside ethical considerations, the U.S. military's decision to fully embrace AI is a testament to the breakneck speed at which this field is advancing.
Corporate America is likely to follow suit. After all, companies that fail to incorporate AI into their workflow risk falling behind their competitors. Put more bluntly, this transformative technology will become necessary for survival for most companies.
Key takeaways
The Vanguard S&P 500 ETF is in a strange place. On the surface, it looks wildly overvalued fundamentally -- especially in an era of high interest rates, sticky inflation, and a shortage of skilled labor in the United States.
AI, however, will likely render most of these headwinds moot. A Gutenberg moment awaits us in the advent of artificial general intelligence, which may happen far sooner than almost anyone expected. As such, you may want to rethink moving to the sidelines.
Yes, volatility will probably become a major factor soon, as AI-based disruptions take hold and society struggles to adapt. But staying invested in a top large-cap-oriented fund like the Vanguard S&P 500 should pay off handsomely over the next 20 years, thanks to the coming AI-powered innovation boom.
