For AI and stock bubbles, the party has to stop sometime
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Illustration: Maura Losch/Axios
If you follow markets and the economy, the only thing you've heard over the last few days is that AI spending is propping everything up, from GDP to the S&P, and that can't last forever.
Why it matters: When bubbles burst, they don't do it gently.
The big picture: Like every land rush in history, from railroads to websites with sock puppet mascots, investor faith in AI is strong enough to ignore all the warning signs around them.
- Barring the data center boom, underlying economic growth isn't that strong.
- Valuations in the stock market are stretched beyond all historic norms, and the best earnings growth comes from just a few megacap companies.
- Tariff policy is starting to show up in inflation data, which threatens to weigh on consumers, the real engine of the economy.
What they're saying: "While you can quibble with this or that estimate or figure, the order of magnitudes make it pretty clear that AI itself is not enough to buoy the economy, sales, or earnings ahead," Bob Elliott, chief investment officer at Unlimited Funds, wrote in a Substack post yesterday.
- "Instead it is going to require an overall economic productivity rise to meet the bulls hopes (and then some)."
The intrigue: AI has so far been very good at getting companies to spend on things like chips, buildings and electricity. The spend on all that stuff runs into the hundreds of billions of dollars a year.
- But it's not translating to spending on people. As Callie Cox, chief market strategist at Ritholtz Wealth Management, put it this week, "The human economy is stumbling, but the robot economy is flourishing."
- In fact, some employers are touting how many humans they've been able to fire with AI. Less so how many they've been able to keep paying and retrain into more productive work.
Reality check: There is no sign yet that any of the biggest players in the market are at all inclined to pull back on spending.
- If anything, the demand looks to be strengthening, inspiring the most magnificently performed of the Mag 7 — Meta, Microsoft, Nvidia — to continue a voracious pace of talent hiring and infrastructure building.
What to watch: How the back and forth plays out between the optimists and the pessimists.
- A stew of bad headlines caused a sharp market selloff last Friday. There was an equally enthusiastic rebound on Monday before a dip yesterday.
- "This week will be a telling one: a tug-of-war is unfolding between traditional institutional seasonality, which suggests weakness, and retail investors who may see a dip as a buying opportunity. It's a good test for who's really in control," wrote Mark Hackett, chief market strategist at Nationwide, on Monday.
