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AI Rally's Unrealistic Economic Hopes
15 Aug
Summary
- AI stock rally relies on unlikely productivity and savings.
- Analysts predict 25% annual earnings growth for five years.
- Unprecedented economic growth is needed for AI stock valuations.
The current surge in artificial-intelligence stocks is underpinned by an economic outlook that demands unprecedented productivity gains and significant household dissaving, according to Bob Elliott, former CIO of Unlimited. He describes the market as experiencing "expectations mania," with investors pricing in extraordinary future outcomes for tech and semiconductor companies.
Analyst estimates projecting 25% annual earnings growth over the next five years would represent the strongest post-World War II performance. Achieving this would necessitate a demanding mix of sales growth and margin expansion. Elliott points out that if margins increase at the expense of labor income, consumer spending could falter, requiring drawing down savings.
Furthermore, the bull case for AI stocks relies on a productivity surge not yet evident in national data. Elliott questions the feasibility of achieving 8% real growth on a non-growing labor force, a level of productivity growth never before seen historically. He also notes the immense scale of investment required, potentially $5 trillion over five years, to justify the projected revenues and productivity gains.
