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Is The Vanguard Growth Index Fund ETF Shares Still a Buy?

The U.S. large-cap growth space is currently in paradox territory. Multiple economic metrics, such as auto and credit card delinquencies, paint a distressing picture for the American consumer. (See the following graph.) Simultaneously, several large-cap U.S. stocks, particularly in the technology sector, are trading at historically high valuations.

US Auto Loans Delinquent by 90 or More Days data by YCharts

Investors have flooded into top tech names like Microsoft (MSFT -1.30%) and Nvidia (NVDA -0.36%) this year in response to the enthusiasm surrounding the artificial intelligence (AI) revolution. The prevailing belief is that AI development is approaching a critical inflection point, potentially ushering in an era of ultra-smart machines capable of transforming human civilization.

Tech valuations are fundamentally unattractive

However, these lofty expectations have led to eye-watering valuations in the technology sector. Because of its chip manufacturing capabilities, Nvidia, a key player in the AI revolution, currently trades at over 72 times trailing earnings.

Microsoft, which is powering the software side of the AI revolution through its partnership with OpenAI, trades at almost 39 times trailing earnings.

For context, the benchmark S&P 500 trades at around 24 times trailing earnings, which is already well above its historical average of 19.7.

This tech-led growth bonanza is particularly evident in the performance of growth-oriented exchange-traded funds (ETFs) such as the Vanguard Growth Index Fund ETF (VUG -0.82%).

This popular Vanguard growth ETF has been one of the fund family’s top performers this year, largely because of its substantial exposure to Nvidia and Microsoft. These two tech stocks account for nearly a quarter of the fund’s total equity holdings.

Despite the fundamentally unattractive valuation of these top AI stocks and the deteriorating financial situation for many Americans, though, it’s still probably a bad idea to back off buying the Vanguard Growth Index Fund. Here’s why.

The AI revolution is just getting started

Bank of America (BAC 1.32%) analysts have made some rather bold predictions about AI’s economic impact, estimating that it could add over $15 trillion to the global economy by 2030. This staggering figure underscores the potential for AI to become one of the most powerful innovations in human history.

If these projections hold, the current valuations of leading U.S. large-cap companies like Nvidia and Microsoft may prove to be relative bargains in retrospect. The key reason is that AI holds the potential to drive double-digit growth in the world economy over the next five and a half years.

Looking beyond 2030, the possibilities become even more intriguing. Nvidia’s CEO Jensen Huang has gone on record stating that AI will usher in the next industrial revolution, potentially creating a $100 trillion generative AI economy.

While this prediction may seem ambitious, it’s not without merit, given the rapid advancements and wide-ranging applications of this technology.

Key takeaway

For stock investors, this powerful trend could prove extremely beneficial in the coming years. The Vanguard Growth Index Fund, with its significant exposure to AI-focused companies, is a low-cost, straightforward way to gain exposure to this transformative theme. So, despite the paradoxical situation unfolding in the broader economy, this popular Vanguard fund still scans as a top buy for long-term investors.

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