Podcast Summary: The Long View – Joe Davis: How to Capitalize on ‘Megatrends’

Host: Christine Benz, Dan Lefkovitz, Amy C. Arnott (Morningstar)
Guest: Joe Davis (Global Chief Economist, Vanguard)
Original Release: September 2, 2025

Episode Overview

In this episode of The Long View, the hosts sit down with Joe Davis, the Global Chief Economist at Vanguard and author of the new book, Coming Into View: How AI and Other Megatrends Will Shape Your Investments. The discussion explores the macroeconomic environment, the forces influencing the global economy, and how investors can position their portfolios in light of major, slow-moving shifts—or “megatrends”—such as AI, demographic changes, and globalization. Davis emphasizes the importance of thinking long-term, building resilience into portfolios, and blending data-driven rigor with practical risk management.

Key Discussion Points & Insights

1. Current Market Environment and Tariffs ([01:44]–[03:02])

• Tariffs and Recession Risk:

  • Davis believes that despite higher tariffs, recession is unlikely. Current equity markets are “a little bit priced to perfection” but not at high recession risk.
    • “If we had a steep fall in equity markets, that would surprise me.” (Joe Davis, [02:52])

• Stagflation and Inflation Risk:

  • Slow-moving, stubborn inflation remains slightly above 2%. The risk of a return to 1970s-style stagflation is viewed as low, barring a “really rapid rise” in inflation coinciding with continued labor market strength ([03:10]).

2. Bonds, Dollar & Diversification ([03:57]–[06:29])

• Bond/Stock Correlations:

  • Bonds still provide diversification, but with higher rates, the negative correlation is not as "supercharged" as it was post-2008. Higher income from bonds is a positive trade-off ([04:22]).

• Dollar Weakness:

  • Recent dollar weakness is partly about US fiscal challenges—the “building national debt and fiscal dynamics.” Davis is not alarmist, but sees it as “a glimpse of one potential future” ([05:30]).

3. Non-U.S. Stocks & Global Diversification ([06:29]–[08:56])

• Case for International Exposure:
  • Joe highlights two reasons for non-U.S. stock exposure:
    1. The source of equity premiums could change geographically; betting solely on U.S. tech means assuming all future star companies stay American.
    2. Currency and fiscal pressures in the U.S. are added reasons for global diversification.
  • “If you don’t have any non-US exposure, you may not realize that’s a really strong technological bet that the future 4% of companies will solely be based in the United States.” (Joe Davis, [07:55])

4. On U.S. Deficits & Debt Levels ([08:56]–[10:39])

• U.S. deficits are a “formidable issue” with a modest effect on rates and inflation for now, but could matter much more over a 3–7 year horizon if technology fails to lift growth.
• “If you have a 3, 5, 7 year investment horizon, you have to have [deficits] on your scorecard.” (Joe Davis, [10:20])

5. Globalization: Myth of Retreat ([10:39]–[13:02])

• Fallacy of De-Globalization:
  • While tariffs and barriers make headlines, the cross-border flow of ideas and innovation is stronger than ever—especially in tech and services.
  • “Unless you’re literally shutting down the Internet and the movement of people… it’s very unlikely that globalization is going to retreat in the broadest sense.” (Joe Davis, [12:43])

6. Defining and Forecasting Megatrends ([13:02]–[18:01])

• What is a Megatrend?

  • Slow-moving forces (demographics, globalization, technological innovation) that, while often ignored in short-term forecasts, exert huge influence on markets and economies.
  • Even small movements can explain “half of the movement in the S&P 500 from month to month and quarter to quarter.” (Joe Davis, [15:11])

• Why Does Wall Street Ignore Megatrends?

  • Overweighting short-term data is a function of human nature, comfort with the familiar, and the structure of active management and asset allocation.
  • “My point is that [short-term data] is just overweighted… It assumes that all the changes we see in the economy are related to what economists call demand… sometimes that’s true, other times… it’s really related to technology.” (Joe Davis, [18:30])

7. Status Quo is Unlikely: Two Competing Outcomes ([20:50]–[28:20])

• The Tug of War:

  • The U.S. faces competing forces:
    • AI/Tech Progress: Could boost productivity, offset aging demographics, and deliver strong growth with moderate inflation—much like the 1990s.
    • Rising Deficits & Aging Population: Without tech breakthroughs, deficits and demographics drag growth down, push rates/inflation up, and raise risk of a “lost decade” for U.S. stocks.

• Probabilities:

  • Roughly 50% chance of a tech/AI-driven boom (U.S. GDP >3%, strong global convergence, non-tech sectors benefit most), and a 1-in-3 chance that AI fails to deliver, leading to slow growth, higher rates, and disappointing equity returns ([23:20]–[27:55]).
  • “If [AI] plateaus… we have an elevated risk of a lost decade in the US stock market.” (Joe Davis, [27:48])

8. Portfolio Implications ([28:20]–[32:01])

• Resilient Asset Allocation:

  • Global Equity Exposure: At least 20% outside the U.S. for risk management, up from traditional home bias ([28:27]).
  • Fixed Income: Higher real rates ahead; fixed income provides defense, particularly in a deficit-dominated scenario.
  • Gold/Inflation Hedges: Only as “tail risks” if Fed abandons inflation fighting—about 5% probability in their model ([31:10]).

• **“If you’re most bullish on AI, you would actually want to invest outside the Mag 7 and technology sphere… If you’re pessimistic on AI and deficits, I would strongly suggest you consider fixed income.” (Joe Davis, [31:38])

9. Fed Independence ([32:50]–[34:30])

• On the Importance of the Federal Reserve:
  • Fed’s independence is one of the “finest institutions” underpinning U.S. economic stability. However, the bond market also serves as an inflation-expectations governor if Fed credibility wavers.

10. AI, Technology, and the Labor Market ([34:30]–[37:16])

• Past vs. Present Tech Shifts:
  • The same technological breakthrough (e.g., the computer) can eliminate some jobs (telephone operator), while boosting others (fund accountant).
  • “We’re talking about… the greatest change in how we do our work since at least the personal computer.” (Joe Davis, [37:04])

11. Career Advice in an AI World ([37:16]–[41:40])

• Advice for the Next Generation:
  • Read Voraciously: At least 3 hours/day to build context and connection, “social media doesn’t count” ([38:21]).
  • Embrace Technology: Try to “automate your job away with AI”—either you’ll get more productive, or realize it’s time to pivot your role ([40:13]).

12. AI and the Financial Advice Profession ([41:40]–[44:49])

• AI as a Compliment (not a Threat):
  • The value of advice—especially behavioral coaching—remains, but tech will increase expectations and could allow advisors to scale their practices and offer richer, more diagnostic plans.
  • “Table stakes for what’s in the [financial] plan will go up, but the ability to scale the practice could go up for those advisors that are able to harness that…” (Joe Davis, [43:21])

13. Low-Cost Indexing, Active, and AI ([44:49]–[47:46])

• Active vs. Passive Investing:
  • Low cost is paramount, whether index or active. Active makes sense where skill net of costs exists—Jack Bogle himself launched many active funds ([45:11]).

14. AI—Unexpected Winners in Markets ([47:46]–[51:44])

• Value Stocks as Second-Half Beneficiaries:
  • In major tech cycles, later-stage returns spread beyond the “producers” (tech giants) to “users”—often value or non-U.S. companies.
  • “If it is truly this transformational… other opportunities emerge. And that’s where it pushes you at the margin.” (Joe Davis, [51:10])

15. Personal Reflections: Lunch with Jack Bogle ([51:44]–[54:43])

• Bogle’s Legacy:

  • The episode closes with Davis recounting advice and influence from Vanguard founder Jack Bogle, emphasizing humility, paying it forward, and focusing on megatrends long before it was industry practice.

    “He made the time to meet with me… Not only did he make time with me, he was asking me about my background… He was on to something [with megatrends].” (Joe Davis, [52:12])

Notable Quotes

• “It’s very unlikely that globalization is going to retreat in the broadest sense.”
  — Joe Davis, [12:43]

• “Megatrends explain half of the movement in the S&P 500 month-to-month and quarter-to-quarter.”
  — Joe Davis, [15:11]

• “Roughly 50% chance over the next five to seven years we will see GDP growth that’s meaningfully above consensus expectations… and we get that with our deficits not being a serious issue.”
  — Joe Davis, [23:44]

• “If [AI] plateaus... we have an elevated risk of a lost decade in the US stock market.”
  — Joe Davis, [27:48]

• “If you’re most bullish on AI… invest outside the Mag 7 and technology sphere… If you’re pessimistic on AI and deficits, I would strongly suggest you consider fixed income.”
  — Joe Davis, [31:38]

• “Read voraciously… if you know what other smart people have known and written, you now have that collective wisdom of hundreds of people.”
  — Joe Davis, [38:21]

Conclusion

Joe Davis provides a nuanced, evidence-driven look at how emerging “megatrends”—especially AI, demographics, globalization, and deficits—are reshaping investment prospects. He urges investors and advisors alike to avoid short-term “status quo” thinking, instead considering a range of possible futures. His practical advice is to focus on risk management: diversify globally, don’t abandon fixed income, be open to non-tech/value stocks as potential AI beneficiaries, and—above all—stay curious and keep learning. The conversation blends macroeconomic rigor with practical wisdom and a touch of humility about the unpredictability of the future.

For Further Reading:

• Coming Into View: How AI and Other Megatrends Will Shape Your Investments by Joe Davis

Timestamps Reference Guide:

• Tariffs/Recession: [01:44]–[03:02]
• Bond Correlation: [03:57]–[05:19]
• Non-U.S. Stocks: [06:29]–[08:56]
• Megatrends Definition: [13:02]–[18:01]
• Two Futures: [23:02]–[28:20]
• Portfolio Implications: [28:20]–[32:01]
• Fed Independence: [32:50]–[34:30]
• AI & Jobs: [34:30]–[41:40]
• AI & Advisors: [41:40]–[44:49]
• Active vs. Passive: [44:49]–[47:46]
• Jack Bogle Anecdote: [51:44]–[54:43]