From disruption to deflation: AI is changing the investment equation

Nostalgia tells us that the world used to be simpler, but simplicity often came at the cost of progress. Productivity was limited, tools were fragmented, and decision-making was slow. Today, much of that has changed—not because we remembered to work harder, but because we built smarter tools. Over the last 30 years, technology has not just changed the way we live and work. It has rewritten the rules of growth, inflation, and returns.

From Analog Chaos to Digital Cohesion

In the 1990s, the workplace was a jungle of devices—fax machines, calculators, Rolodexes, tape recorders. Each device served a narrow function, and each function added time. The arrival of the PC consolidated these functions. The internet democratized access. The smartphone untethered it all from geography. What once took 12 tools and a filing cabinet can now be done, better and faster, on a phone screen in a coffee shop.

This dramatic compression of space and function fueled a step-change in productivity. Entire business models were built around this evolution. Investors who were early to search, mobile, and cloud rode a generational wave of compounding returns. But what came next could be even more profound.

Enter AI: The Deflationary Growth Engine

We believe we are now at the early stages of the most significant productivity revolution since the internet—driven by artificial intelligence. And unlike past innovations, which digitized work, AI is now optimizing it.

AI isn’t about replacing humans. It’s about removing friction. In sectors from logistics to law, AI is already reducing decision latency, summarizing complex data, and automating routine tasks. As it moves off the screen and into physical form—through robotics, autonomous systems, and intelligent environments—the potential impact on real-world productivity is unprecedented.

If technology has always aimed to do more with less, AI is a breakthrough in doing more with far less.

• Less labor: Routine tasks, customer support, data entry, and even basic analysis are being automated.
• Less time: Real-time processing, from language to logistics, is speeding up throughput.
• Less capital intensity: Software and compute scale with near-zero marginal cost.

The result? A force that pushes unit costs down and output up. In economic terms: disinflationary growth. In investment terms: higher returns on equity, expanding margins, and a re-rating of productivity leaders.

Inflation Is the Problem. AI Might Be the Answer.

The macro environment over the past several years has been dominated by concerns about inflation, debt, and secular stagnation. The Fed hiked, the yield curve inverted, and the market obsessed over soft landings. But underneath these noisy cycles, something powerful was building: AI-driven capex, revenue growth, and productivity.

Unlike traditional stimulus, which often adds to inflation, AI investment may be the rare force that boosts GDP while reducing cost pressures. Think of it as the opposite of stagflation—a scenario where rising output doesn’t require rising input. And it’s already visible:

• Leading tech firms are compounding free cash flow and reinvesting in ways that produce real productivity, not just financial engineering.
• The largest US companies now generate ROEs over 50%, with low leverage and historic margins.
• AI adoption is compressing cost structures while expanding end markets. The result is growth with deflationary tendencies—a combination we’ve rarely seen at scale.

This may be the most important reason investors should pay attention. In a world worried about debt sustainability and cost-of-capital, AI offers a credible way to grow the denominator in the debt/GDP ratio.

Investing in the "Good New Days"

Skeptics point to valuations. But valuations alone don’t cause corrections—fundamental deterioration does. Today’s tech leaders are not just expensive; they’re productive. The largest companies are producing multiples of the cash flows seen by previous market leaders. Their scale, moats, and cash positions make them less sensitive to higher rates and more sensitive to reinvestment opportunities.

We are not suggesting that every AI-themed asset is a buy. But the broader implication is clear: we are in the early innings of a productivity-led, investment-heavy, innovation-driven cycle. One where real income, real returns, and real growth can all be achieved—if you own the right parts of the market.

That means:

• Staying exposed to companies with high ROEs, net cash balance sheets, and reinvestment flywheels.
• Diversifying into sectors where AI is enhancing—not threatening—unit economics (e.g., logistics, healthcare, defense).
• Owning income in fixed income, but equity in duration—especially where margin expansion meets deflationary growth.

Final Thought: Don’t Miss This

The risk isn’t overvaluation. It’s underexposure.

This may be one of the few moments in market history where new technology can lift both productivity and profitability while lowering inflation. That’s not just good for quality of life. It’s good for portfolios.

The "good old days" weren’t really all that good. The good new days might just be the best we’ve seen yet.

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