Chris Davis on Navigating AI & Index Concentration

Davis opened the discussion by validating advisor anxiety regarding high valuations and mega-cap concentration. He cautioned against the “loser’s game” of short-term market predictions, noting that even top Wall Street strategists miss interest rate directions nearly 60% of the time.

See More: DUSA Crosses $1 Billion Milestone as Value Resurgence Gains Steam

Instead of forecasting, Davis urged advisors to rely on working assumptions:

• Volatility is the “admission fee”: Investors should expect a 10% correction annually and a 20% bear market every 3.5 years.
• The passive advantage: Passive indexes are currently “driven by the past, not the future,” leaving investors overexposed to fragile momentum models and companies that may soon be “the walking dead” due to technological disruption.
• Cash is a quiet killer: Sitting on the sidelines effectively erodes purchasing power; Davis noted that even in low-inflation periods, a “safe” dollar can lose half its value over 25 years.

While the market is currently in a “stage of hype” regarding AI, Davis views the technology as a productivity revolution akin to the advent of electricity. However, he warned that such shifts create an enormous dispersion of outcomes, making selectivity paramount.

Davis Advisors categorizes the AI landscape into five distinct groups:

1. Platform winners: These are the resilient giants with massive cash flows and proven models, such as Meta, Amazon, and Alphabet.
2. Enablers: The “picks and shovels” of the revolution, providing essential hardware and resources. Examples include Applied Materials, Texas Instruments, and even Coterra (which provides the natural gas required to power AI data centers).
3. Users: Companies like Capital One and UnitedHealth Group that leverage data and AI to aggressively reduce costs and widen their competitive moats.
4. The indifferent: Durable businesses whose fundamental models remain unchanged by AI, such as Tyson Foods or MGM Resorts.
5. The walking dead: Vulnerable companies with “artificially wide moats” that AI will eventually bridge, specifically legacy business models at risk of disruption.

For Davis, the goal is to find “growth stocks in disguise” at discounted prices. He pointed to the Davis Select US Equity ETF (DUSA C) as a reflection of this philosophy. Despite being value-oriented, the portfolio’s 25 holdings have averaged roughly 17% annual growth over the last five years, significantly outpacing the Russell 1000 Value Index, while trading at a much lower price-to-earnings (P/E) multiple than the S&P 500. 

“You can’t do what everybody else does and expect a different result,” Davis concluded. In an era where the Magnificent Seven may look entirely different in seven years, he argues that the ability to adapt, research fundamentals, and avoid overpaying is no longer just a strategy — it’s a necessity for long-term wealth compounding.

Davis Advisors also manages the Davis Select Financial ETF (DFNL ), an active strategy that seeks to outperform passive benchmarks like the State Street Financial Select Sector SPDR ETF (XLF A) through concentrated, research-driven stock selection

The conversation surrounding active management’s role in this new era is only gaining momentum. For advisors looking to dive deeper into these strategies, the dialogue will continue at the upcoming Exchange conference. Dodd Kittsley, national director at Davis Advisors, will join Rosenbluth on stage to further discuss the evolution of active ETFs. 

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