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Investors are too optimistic concerning the near-term prospects of AI, Vanguard said.
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Firms would want to growth profit by 40% annually for the following three years to match valuations, the firm said.
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“That is double the annualized rate of the Nineteen Twenties, when electricity lit up the nation,” Vanguard wrote.
With tech firms still pushing the boundaries of artificial intelligence, market excitement for it seems infinite.
But this enthusiasm expects an excessive amount of from the technology in too little time, Vanguard wrote on Thursday.
Wall Street is rife with upbeat forecasts about what AI could do to the economy and company profits. Most of them are pinned to a US workplace revolution and a productivity boom.
That optimism has helped fuel strong stock gains, with the benchmark S&P 500 up 18% year-to-date through Thursday.
But Vanguard global chief economist Joe Davis thinks expectations are too high, and says that stocks are overvalued even when the AI boom plays out as anticipated.
He estimates that US corporate profits would must growth by 40% annually over the following three years to justify where stocks are trading now. For context, the S&P 500’s trailing one-year earnings growth rate through the second quarter of 2024 was 10.9%, in line with FactSet data.
“I’m optimistic concerning the long-term potential of artificial intelligence to power big increases in employee productivity and economic growth,” global chief economist Joe Davis wrote. “But I’m pessimistic that AI can justify lofty equity valuations or save us from an economic soft patch this 12 months or next.”
He continued: “That is double the annualized rate of the Nineteen Twenties, when electricity lit up the nation — not to say economic output and company income statements.”
Such a historic surge in corporate performance looks even less probable if the economy cools down next 12 months. Vanguard expects GDP to expand by just 1% to 1.5% in 2025.
It is not that the investment firm has no faith in AI’s potential — its research suggests 45% to 55% odds that AI will trigger a boom in labor productivity. Between 2028 and 2040, that would spur a 3.1% annualized rate of US growth in real terms.
But investors have to let go of any notions that this may occur immediately, Davis said. While firms have poured billions to advance their position within the sector, some market players are incorrect in pondering that AI investing will reach $1 trillion within the near term:
“$1 trillion in AI investment by 2025 would require 286% growth. That is probably not going to occur, which suggests we’re unlikely to experience an AI-driven economic boom in 2025,” he said.
Some on Wall Street are way more pessimistic. BlackRock has said there’s a robust likelihood that heavy AI investing will trigger higher inflation before any production boom can come. That would erode corporate profit growth.
Read the unique article on Business Insider