The Viewpoint: Living forwards, investing backwards

AI-driven optimism is elevating valuations and could again reward investors who resist the prevailing enthusiasm rather than simply backing the technology’s first celebrated winners.

• Warren Buffett’s portfolio emphasizes resilient businesses such as Coca-Cola, American Express and BNSF, whose products and services have remained largely unchanged over decades.
• The US stock market traded at 10x forward earnings in March 2009, versus a peak of 24.4x in March 2000; its forward PE fell 59% over the following nine years.
• The market now trades at around 20x forward 12-month earnings, above its 25-year average of 16.4x, amid renewed technology-led optimism about AI.
• Historically, infrastructure builders in railroads, internet fibre, cars and planes were often overbuilt and delivered disappointing investor returns, while users such as Amazon created value by applying new technologies rather than inventing them.
• The central AI investment question is whether infrastructure providers or application companies will capture the profits, and whether incumbents or new entrants will lead the applications.

Takeaway: Investors should neither dismiss AI’s productivity potential nor assume that today’s perceived winners will retain the profits; valuation, competitive advantages and returns on capital remain essential as the technology redistributes value unpredictably.