Markets are pricing in long-term AI winners. This veteran investor says history proves customers win more than innovators.

By Barbara Kollmeyer

Rob Arnott warns investors are paying far too much for tech heavyweights

The AI winners may be those companies "left in the dust," according to veteran Rob Arnott.

As investors increasingly scrutinize spending by artificial intelligence-related companies, many still want exposure to the big names that they hope will keep driving that new technology.

History shows those bets won't hold up, according to Rob Arnott, founder of Research Affiliates and chairman of Syzygy Asset Management, which manages $32 billion.

"The simple fact is that [of] the 10 most valuable tech stocks in the world in the year 2000, one has beat the S&P 500 in the subsequent quarter-century, Microsoft, by 2% a year. The rest underperformed the S&P 500. Four of them don't even exist anymore, two more had a negative cumulative return over the last quarter-century, a negative return and then the rest had a modest positive return," he told The Intangible Economy With Kai Wu podcast in an interview that was released Wednesday.

Every such revolution is accompanied by a bubble, but markets mistakenly view those leaders as staying dominant through protective moats, he said. "OpenAI was disrupted by DeepSeek; Google was disrupted by OpenAI," he said.

"Capitalism requires that you provide a product that's more valuable to the customer than you're charging for it, and so the big winners are going to be the rest of the economy that's been left in the dust," he said.

While markets are pricing in what they think will be the enduring AI winners, every big technological revolution "requires that the customers win more than the innovators." So AI users using the technology to work more efficiently become more valuable to them than the actual innovators, he said.

For example, Ralph Lauren created an interactive fashion-advice app called Ask Ralph that absorbed every interview the fashion mogul had ever given. Rather than a revolutionary AI company, the company has figured out how to use the technology to sell more products.

Investors who own the S&P 500 SPX are disproportionately exposed to those perceived AI winners, even as those companies have also gotten more expensive to own. A study he co-wrote showed that, in the past decade, the top 500 companies massively outperformed the next smaller 500 - the midcaps - but because of rising profits, not due to weak growth for the latter.

In 2014, those top 500 companies could be picked up 15% cheaper than the group of midcaps, but the reversal in the decade since has been stark, with investors paying 80% more to own them. He said one of two things has to happen next: Either profits of the top 500 need to surge well past those of smaller companies or their stock prices have to get cheaper.

Arnott pointed out that the distance between valuations of U.S. large-cap growth stocks and small-cap value stocks is at an extreme not seen even during the dot-com bubble. "I think these 1,400 companies in Russell 2000 RUT value are highly likely to outperform the large cap growth that so utterly dominates our attention these days," he said.

The Russell 2000 RUT is up about 12% so far in 2026, while the S&P 500 is up 13%.

Outperformance of 6% to 8% per year for the coming decade would be needed "just to get things remotely back in line. So this is really an opportunity-rich environment," he said.

Arnott, known as the "godfather of smart beta," is also a co-portfolio manager on the Pimco All Asset and All Asset All Authority funds and the Pimco RAE funds.

One more warning from Arnott: As tech giants shift from asset-light to capital-heavy models, for example, the chips they are buying for the AI build-out are being treated on their balance sheets as if they will have a lifespan of five to seven years. In reality, they may only really be valuable to the company for three years due to technology advances, he said.

"Over six years, then that means that let's say there is a trillion dollars of spend in a given year on AI tech. That means half a trillion of it will be a write-off in three years. And that write-off hasn't begun to hit the books, but it will happen," he said.

"I'm not saying the AI revolution isn't real, but why not take some chips off the table and put on the unnoticed parts of the market small-cap value, emerging-markets value are trading dirt cheap."

-Barbara Kollmeyer

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10-22-26 0840ET