Will U.S economy, S&P 500 collapse if AI gold rush stops?
By one measure, investments in computer hardware and software accounted for more than 90 percent of growth in gross domestic product in the first half of the year. While economists caution against taking these numbers at face value—without AI, some of those dollars would flow elsewhere—they say there’s no doubt that AI investments help explain the economy’s surprising resilience this year, NYT News Service reports.
But relying on AI as a source of growth raises a question for the economy: What happens if the gold rush stops?
This threat is most clearly visible in the stock market, which has broken record after record in recent months, largely on the strength of a handful of AI-focused companies. Seven companies, including Amazon, Microsoft and Google parent Alphabet, now account for more than a third of the value of the S&P 500 index. Nvidia, which is just one of the so-called Magnificent Seven and produces the chips that power many of the most advanced large language models, briefly exceeded $ 5 trillion in market value.
Stock Market Valuations
Such high valuations are based on assumptions that recent rapid growth will continue for years to come, which some investors warn may not be realistic. Even OpenAI CEO Sam Altman said in August that he thought investors were very excited about artificial intelligence. Nvidia’s strong quarterly earnings report on Wednesday failed to fully dispel those doubts. The bursting of the bubble – whenever it happens – can have real-world consequences. Consumer spending in recent quarters has been increasingly driven by higher-income households, who continue to shop even as many lower-income families pull back. But if the stock market stumbles, wealthy households may also cut back on spending. “If spending growth is driven by households benefiting significantly from the performance of AI-related names in the stock market, then the stock sell-off could actually be quite painful for the economy,” said Aditya Bhave, a US economist at Bank of America. “This creates a degree of vulnerability.”
Low-income households did not benefit from the stock market rally. But they could still be harmed by a reversal. If wealthy Americans spend less on restaurant meals, vacations and luxury goods, that could lead to job losses in the service industry.
“If you see a decline in leisure and hospitality spending at the top end, that has knock-on effects,” said Michael Reid, an economist at RBC Capital Markets. “This is where I wonder about the downward trend in the labor market.”
Investing in artificial intelligence
For now, the rise and its spread throughout the economy show little sign of slowing down. U.S. companies spent more than $60 billion on computer equipment in the second quarter; This figure increased by 45 percent compared to the previous year. They spent another $10 billion on data center construction, a 35% increase. Economists and industry experts say artificial intelligence likely explains much of this growth.
These investments ripple outward, supporting parts of the economy outside the traditional technology sector. Caterpillar, typically associated with its bulldozers and excavators, has seen an increase in sales of turbines and power generation equipment used in data centers. Another industrial conglomerate, Johnson Controls, has benefited from demand for cooling and fire suppression systems. Eaton Corp., which makes power management systems, has a growing backlog of projects waiting for its equipment.
Companies believe this growth will continue. Eaton is investing more than $1 billion to expand manufacturing capacity to meet growing demand, and this month it announced it would spend $9.5 billion to acquire Boyd Thermal, which makes cooling equipment used in data centers.
“We are very early in the process of developing artificial intelligence,” Eaton CEO Paulo Ruiz said in an interview.
The two-way nature of the economy is especially evident in the construction industry, which has been hit by high interest rates and tariffs. Non-residential construction expenditures continued their downward trend by falling in August. Home construction is well below its pandemic-era peak.
Will the AI Bubble Burst?
Still, many economists and industry experts say the infrastructure-building phase of the AI boom has room to continue. As data center capacity grows at a record pace, so does demand, and companies are reporting years-long backlogs. Demand for infrastructure will likely continue to grow, said Paul Ashworth, chief North American economist at Capital Economics.
“It’s really just getting started,” he said. “The stock market may be near a bubble,” he added, but there is little sign that the industry is buying too many chips or building too many data centers.
But for these investments to pay off, AI will need to deliver on its promise not just as a useful tool but also as a transformational technology that leads to major increases in productivity.
What if this doesn’t happen?
“Many of the investments made may turn out to be unjustified,” said Bhave, the Bank of America economist.
FAQ
Q1. What is the full form of artificial intelligence?
A1. The full form of artificial intelligence is Artificial Intelligence.
Q2. Who is the CEO of OpenAI?
A2. Sam Altman is the CEO of OpenAI.
