Last summer, we explored why certain disciplined approaches to investing might still hold up in an era increasingly shaped by AI. A year later, as the technology becomes more central to how markets function, we're asking a deeper question: what happens when the machines are the ones doing the thinking?
As artificial intelligence and robotics reshape the global economy, investors have a pressing question to ponder: what will happen to equity markets in a world where human cognition and labor are replaced by machines?
It’s tempting to imagine markets continuing to rise, powered by soaring productivity and near-limitless scalability. And to a degree, that intuition should hold. If capital earns more because labor becomes less necessary, then the owners of capital—i.e., shareholders—should continue to benefit. High return on capital generally supports equity valuations. AI, in this sense, is not just another technological wave; it’s a multiplier on capital efficiency.
But this transformation also poses structural questions. If machines eventually do most of the thinking and work, what will be the role of the human investor? More to the point: in markets increasingly dominated by AI agents—machines doing the buying and selling without human input—what, if anything, will remain of traditional investment wisdom?
Historically, investors have relied on persistent patterns of outperformance tied to certain characteristics, or "factors": value stocks tend to beat growth stocks over long periods. Small-cap stocks tend to outperform large caps. And highly profitable companies tend to deliver stronger returns than weaker ones, all else equal. These are not theories; they are well-documented phenomena, backed by decades of data.
But factor-based investing works in part because markets reflect human behavior—imperfect, reactive, and often biased. Humans overreact to bad news. They neglect unloved sectors. They underestimate the staying power of quality businesses. In short, behavioral inefficiencies create pricing gaps that disciplined investors can exploit.
What will happen when AI does the pricing?
Some of these inefficiencies may shrink. Algorithms won’t get spooked by headlines or bored by small caps. If thousands of AI agents are competing with similar tools, data sets, and models, they might converge—perhaps rapidly—on the same conclusions. In a world of hyper-proficient, near-identical AIs, traditional sources of alpha could get arbitraged away quickly. Value and quality premiums may simply disappear. The microcap edge might shrink because no corner of the market will remain neglected.
And yet, the case for broad equity ownership will remain. (Even as new sources of systemic risk could be a worry.)
Even in a fully AI-driven market, businesses will still exist in the real world. They'll produce goods, deliver services, earn profits, and sometimes exceed expectations. Equity markets, at their core, are mechanisms for allocating the returns of human (or machine-augmented) ingenuity. That part of the story shouldn’t disappear.
So if prediction becomes harder and pricing more efficient, the case for diversification will remain as strong as ever. It will remain the clearest way to stay exposed to the full range of where value might emerge, even when it may be harder to see in advance.
Some factors may persist—especially those tied not to psychology, but to structure. Small caps should still carry a risk premium, even if priced by machines. But the behavioral edge of most traditional factor investing could fade.
Still, this shouldn’t mean the obsolescence of everything we know about investing. It should just reorient our expectations.
In the future, we may earn less from spotting inefficiencies and more from patiently owning resilient systems. We may stop thinking like traders and start thinking more in systems terms. And in a world where AI handles the "how," our job as investors will continue to hold important questions of "what for" and "on whose behalf" and—if we're very lucky—"What are the AIs' blindspots?"
The machines may optimize, but we will still get to choose the purpose (we are hoping!).
The fraught future for labor markets, and potential policy solutions, are a tricky topic for another time.
Blair Hall Advisors always welcomes your thoughts and questions. We are thoughtfully expanding our client community. To start a meaningful conversation, feel free to contact us. We're here to listen and guide.
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