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Vanguard said investors are very optimistic about the near-term prospects of AI.
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The company added that companies would need to grow earnings by 40% annually over the next three years to match the valuations.
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“This is double the annual rate in the 1920s, when electricity powered the country,” wrote the Vanguard newspaper.
As technology companies continue Pushing the boundaries The excitement in the market about artificial intelligence seems endless.
But this enthusiasm expects too much technology in too short a time, forefront I wrote on Thursday.
Wall Street is full of optimistic predictions about what AI can do for the economy and corporate profits, and much of that speculation is tied to a revolution in the U.S. workplace and a surge in productivity.
That optimism has helped fuel strong stock gains, with the benchmark S&P 500 up 18% year-to-date through Thursday.
But Joe Davis, Vanguard's chief global economist, thinks expectations are too high, saying stocks are overvalued even if the AI boom goes as expected.
It is estimated that U.S. corporate earnings would need to grow 40% annually over the next three years to justify where stocks are trading now. In that context, the S&P 500’s earnings growth rate in the past year through the second quarter of 2024 was about 10.9%. FactSet Data.
“I am optimistic about the long-term potential of AI to deliver significant increases in worker productivity and economic growth,” wrote Joe Davis, chief global economist. “But I am pessimistic about AI’s ability to justify high stock valuations or rescue us from a weak economic patch this year or next.”
“This is double the annual rate in the 1920s, when electricity powered the country — not to mention economic output and corporate income data,” he continued.
Such a historic surge in corporate performance looks less likely if the economy slows next year. Vanguard expects GDP to grow by just 1% to 1.5% in 2025.
That’s not to say the investment firm doesn’t believe in AI’s potential — its research suggests there’s a 45% to 55% chance that AI will increase labor productivity. Between 2028 and 2040, that could lead to a 3.1% annual growth rate in the U.S. in real terms.
But investors need to let go of any notion that this will happen immediately, Davis said. While companies have Pouring billions into progress Given their position in the sector, some market players are wrong to believe that AI investment will reach $1 trillion in the near term:
“Investing $1 trillion in AI by 2025 would require 286% growth. That’s unlikely to happen, which means we’re unlikely to see an AI-driven economic boom in 2025,” he said.
Some on Wall Street seem more pessimistic. BlackRock said there is a strong possibility that heavy investment in AI could create High inflation before any production boom can come, which could erode corporate earnings growth.
Read the original article on Business Insider
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