Jamie Wilhelm and Sunit Gogia of Fort Washington Investment Advisors expect the AI wave to continue, but describe leading indicators of an eventual downturn
The managers of the Touchstone Large Cap Focused Fund expect the AI wave to continue for a long time, but they are also prepared to detect leading indicators of an eventual slowdown.
You might agree with the consensus that the generative AI build-out will last for years. But as an investor, you should watch for the eventual warning signs of a slowdown and consider how to protect your portfolio through an up-and-down cycle.
Jamie Wilhelm and Sunit Gogia of Fort Washington Investment Advisors manage the $3.6 billion Touchstone Large Cap Focused Fund SICWX, which is rated four stars (the second-highest rating) within Morningstar's "Large Blend" category.
During an interview with MarketWatch, Wilhelm and Gogia looked through the AI build-out cycle and explained how investors might eventually see warnings that the growth burst is ending. They provided insight into how they select companies that are likely to weather storms over the long haul.
This cycle is nothing like the late 1990s tech boom
When the stock of the leading hardware maker enabling a technological paradigm shift rises more than fivefold in only three years, the obvious question for investors is whether we are in the middle of a bubble that will soon burst. Over three years through Thursday, Nvidia's (NVDA) stock returned 441% with dividends reinvested. It now has the largest market capitalization for any publicly traded company, at $5.41 trillion.
Nvidia's sales are still growing rapidly, and the company has improved its profitability, with revenue in the latest quarter more than doubling from a year ago.
Nvidia's stock was the third-largest holding of the Touchstone Large Cap Focused Fund, with a 7.2% allocation as of June 30. The largest holding was Alphabet's stock (GOOGL), making up 9.2% of the fund, followed by Microsoft shares (MSFT) at 7.9%. Rounding out the fund's top five holdings were shares of Apple (AAPL), with a 7.1% position, and Amazon (AMZN) at 6.4%.
Wilhelm said the artificial-intelligence build-out is proceeding in a different way from the dot-com boom that began to deflate in 2000. He said there was "a lot of fiber capacity being laid down ahead of demand" in the 1990s. One might have concerns that there won't be enough demand for all the AI services and associated computing capacity being created now. "But what we have seen so far in this AI cycle," which began with the launch of ChatGPT in November 2022, "is that utilization is very high," he said.
"We still don't have enough compute to serve existing demand," Gogia said. He added that, with some political pushback against the construction of data centers, "there are questions of whether or not the capacity can be brought online."
With the high utilization, "you are seeing a continued investment cycle," Wilhelm said, adding that "it is possible for excess capacity at some point, which can lead to a selloff" in the stock market.
When asked about the decline in Nvidia's forward price/earnings valuation to 16.7 from 25.3 at the end of 2025, even as the stock has risen 20% in 2026, Wilhelm said one reason was the increase in interest rates, "which can affect the multiples of the entire market." Gogia said the pushback against data centers might also have placed a drag on Nvidia's P/E multiple.
Wilhelm expects AI to "impact every area through healthcare, maybe in drug discovery, looking at data," to speed up the processes needed to develop medications and treatment techniques.
But the disruption of AI, and even its efficiency improvements, may not benefit all industries. "Banks have very high labor content. If they can get more productive, it remains to be determined if banks can keep profits and let them flow to the bottom line. We think a lot of that will be competed away," Wilhelm said. That comment points to the long-term philosophy he and Gogia follow when selecting companies in which to invest.
Despite concerns over eventual overcapacity, Gogia remained upbeat: "We think this generative AI wave is a multiyear platform shift. Over time, we will consume way more AI compute than we do today, but there will be periods of oversupply along the way."
Warning signs you may eventually see that the AI cycle is at least taking a breather
Wilhelm and Gogia explained what investors might see in advance of a broad decline in stocks that have soared during the AI build-out.
The large semiconductor manufacturers "are high operating-leverage businesses. If supply begins to outstrip demand, the earnings for these companies go down pretty quickly. You need to be careful," Wilhelm said.
Some investors may not realize that only three years ago, memory-chip maker Micron Technology (MU) posted a net loss of $5.8 billion during its fiscal 2023, when its sales declined 49% from the previous fiscal year. Micron is now the ninth-largest holding of the State Street SPDR S&P 500 ETF Trust SPY after its stock has gained 279% so far this year.
Wilhelm said there may eventually be signs of overcapacity for AI-related hardware and services. "You would begin to see the rental prices for AI compute come down. You could see inventory of various items build along the supply chain," including chips and servers.
His comment about prices for AI computing power can be tied to a group of pure-play providers of cloud-computing services, known as neoclouds. This group includes CoreWeave (CRWV), whose revenue for the first half of 2026 more than doubled from the first half of 2025, although the company has continued to post operating losses. CoreWeave has been a volatile stock. It was up 21.4% for 2026 when it closed at $90.13 Thursday. But it was down 35% from a closing peak of $137.98 on May 6, according to FactSet.
Related: NeoCloud stocks like CoreWeave are having a moment - and time's running out to cash in
Long-term investments that can weather industry and market downturns
Wilhelm's comment about price competition wiping out some banks' potential benefits from AI-driven efficiency improvement springs from his and Gogia's focus on companies with competitive moats or that operate in industries with high barriers to entry.
"We buy businesses that have cycles to them, but also make sure we buy businesses that have barriers to entry and can sustain those barriers even when the cycle is over," Wilhelm said.
Despite holding stocks of some very familiar names, listed above, Wilhelm said that all companies in the portfolio he manages with Gogia are in industries "with moderate or high barriers to entry."
"The key is the barrier - or the moat - will protect you from bad management," he said. A specific example is Boeing (BA), which is held by the Touchstone Large Cap Focused Fund. For five years through July 30, 2024, the day before Boeing announced that Kelly Ortberg would take over as CEO the following week, the company's stock had fallen 45%, while the S&P 500 SPX had returned 96%.
Boeing is in the midst of a multiyear turnaround effort. Wilhelm said he had decided to buy the stock even before Ortberg took over the company's management.
"People were wondering why we bought Boeing, but that was normal for us," he said, because he saw long-term value in the stock. "They have a true operator running the company for the first time in a long time," although it will be a long road to operational excellence, he said.
"That goes back to the moat," Wilhelm said, referring to the "global duopoly" for large passenger jets that it shares with Airbus $(EADSY)$.
"That moat protected them against a lot of bad stuff," he said. "They had a series of managers who did not do a good job. And now here we are."
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