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Investors are overly optimistic about AI’s short-term prospects, according to Vanguard.
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Companies would need to grow profits 40% annually over the next three years to match valuations, the company said.
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“This is double the annual rate of the 1920s, when electricity lit up the nation,” Vanguard wrote.
With technology companies still push the boundaries of artificial intelligence, the excitement in the market seems endless.
But this enthusiasm expects too much from the technology in too little time. Forefront wrote Thursday.
Wall Street is full of optimistic predictions about what AI could do to the economy and corporate profits. Most of them are linked to an American workplace revolution and productivity growth.
That optimism has contributed to strong stock gains, with the benchmark S&P 500 up 18% this year through Thursday.
But Joe Davis, Vanguard’s global chief economist, thinks expectations are too high and says stocks are overvalued even if the AI boom develops as expected.
He estimates that U.S. corporate profits will need to grow 40% annually over the next three years to justify where the stock is trading now. For context, the S&P 500’s earnings growth over a year through the second quarter of 2024 was 10.9%, according to data. FactSet data.
“I am optimistic about the long-term potential of artificial intelligence to enable major increases in worker productivity and economic growth,” wrote global chief economist Joe Davis. “But I’m pessimistic that AI can justify high stock valuations or save us from an economic recession this year or next.”
He continued: “This is double the annual rate of the 1920s, when electricity lit up the nation – not to mention economic output and corporate bottom lines.”
Such a historic increase in business performance seems even less likely as the economy cools next year. Vanguard expects GDP to grow just 1% to 1.5% in 2025.
It is not that the investment firm does not have confidence in the potential of AI. Her research shows that there is a 45 to 55 percent chance that AI will bring about a huge increase in labor productivity. Between 2028 and 2040, this could fuel 3.1% annualized growth in real terms in the US.
But investors should abandon any ideas that this will happen immediately, Davis said. While companies do have that has poured billions into moving forward Due to their position in the industry, some market players are wrong to think that AI investments will reach $1 trillion in the short term:
“$1 trillion in AI investments by 2025 would require 286% growth. That’s probably not going to happen, which means it’s unlikely we’ll see an AI-powered economic boom in 2025,” he said.
Some on Wall Street are much more pessimistic. BlackRock has said there is a good chance there will be heavy AI investments higher inflation before a production boom can occur. That could undermine companies’ profit growth.
Read the original article Business insider