AI Stocks Are Soaring, But Don’t Expect AI to Boost the Economy Anytime Soon

While AI stocks are currently outperforming the market, artificial intelligence is unlikely to provide an immediate boost to the economy, according to Joe Davis, Vanguard’s global chief economist. In an analysis released on August 22, Davis cautions that despite the excitement surrounding AI, it won’t resolve economic challenges in the near term.

Davis acknowledges that AI has the potential to enhance productivity and drive long-term economic growth. However, he points out that the current surge in AI-related stock prices—referred to as “lofty equity valuations”—is unjustified and unlikely to have a significant short-term impact on the economy. He believes AI will not rescue the economy from anticipated slowdowns this year or next.

Recent investments in AI technology have driven growth in specific sectors and boosted share prices. Data from JPMorgan Wealth Management shows that AI stocks have outperformed U.S. and global market indexes by approximately 30% from early 2023 to May 2024.

Davis highlights that U.S. AI investments reached $67 billion last year and are expected to hit $76 billion this year. However, he argues that achieving substantial economic growth would require at least $1 trillion in AI-related spending by 2025. Without such a significant investment, AI alone will not be sufficient to elevate economic growth beyond its current trend of about 2%.

In summary, while AI continues to capture investor interest, its role in driving immediate economic improvement remains limited.