Christine Kashkari: Joe, you've said AI might be the next general-purpose technology, similar to electricity and telephone, that transforms industries and society. At this point in time, where are we in the AI J-curve and what should investors be thinking of as this moves forward?

Joe Davis: Yeah, Christine, thanks for the question. I'm really proud of the fact that we collected more data on technology over the past 150 years than any organization to my knowledge in the world. And we looked at the investment cycle. And what I was surprised to find is that there's two phases to the investment cycle during a period of technological change.

And in the first phase—I would argue we're in that phase now with AI—the producers of AI, could be computer chips, could be the software, could be great companies, public and private, delivering the technology, that's whose prices tend to ascend the most. We saw that with the internal combustion engine, locomotives, electricity, personal computer.

What I was surprised to find is that the investment opportunity set changes—so much so that I call it the great rotation—and it happens for three reasons. And what the cycle is, is companies outside of tech outperform in the back half.

You know, there tends to be a little bit of over-investment in the first cycle. Those companies, although they're growing very quickly, they don't benefit as much as the second half versus the rest of the economy.

You have to understand this is a general-purpose technology. It's making all companies in the economy way more efficient, not just those in Silicon Valley. So there's a good convergence of non-tech companies through profitability. The second reason is you have a lot of new entrants in the tech space. It happened with the automobile, it happened in these other past cycles. And so there's a lot of creative destruction, there's failure rates. So there's still great companies that survive, but that brings down the ROI or the return of the technology basket.

And the third one and I think we're seeing it play out is that you have the general-purpose technology disrupts its own industry the most and that is clear in our research. And so it was hardware versus software in the late 90s. It was energy, changing energy consumption with electricity. It was the automobile affecting railroad profitability because trucking now changed transportation of goods.

And so we could very well see this with AI. Some companies do very well. You have software companies under pressure. And so as a basket, you just get volatility there.

I get excited about the opportunities that can emerge in the second half of the investment cycle, which may sound counterintuitive, yet it’s very consistent with how technology transforms the economy and how it can open up the investment landscape in our portfolios.