After more than half a month of correction, the US stock market has returned to near historical highs, and the Nasdaq index has also rebounded significantly since early August. This indicates that the market's pursuit of US tech stocks seems to continue, driven by the artificial intelligence boom.
But Wall Street giants have already issued warnings about this.
Recently, the Chief Economist of Vanguard Group wrote in a report that the market's expectations for artificial intelligence technology seem to be too high, and Wall Street seems overly optimistic about the economic growth and corporate profit growth brought by AI technology, which has led to high valuations of US tech stocks.
The valuation of the US stock market is significantly overvalued
In the past two years, 'artificial intelligence' has undoubtedly been the hottest word on Wall Street, without a doubt. Many Wall Street investment banks tout "artificial intelligence" as a greater technological revolution than the Internet, believing that it can bring about substantial productivity growth, drive corporate profits to increase significantly, and boost national economic growth.
Driven by this optimistic sentiment, the US stock market has experienced significant growth in the past two years and has continuously broken historical highs this year. As of now, the S&P 500 index has risen by 18% this year, while the Nasdaq index has also risen by 19.1% this year.
But Joe Davis, the global chief economist of Vanguard Group, believes that people's expectations are too high. He said that even if artificial intelligence technology can truly flourish as expected, the US stock market is overvalued.
He estimates that American corporate profits must grow at a rate of 40% per year for the next three years to prove that the current trading level of stocks is reasonable. However, according to FactSet data, as of the second quarter of 2024, the profit growth rate of companies in the S&P 500 index over the past year was only 10.9%.
Joe Davis wrote, "I am optimistic about the long-term potential of artificial intelligence in driving significant increases in worker productivity and economic growth... but I am pessimistic about whether AI can justify high stock valuations or save us from this year's or next year's economic downturn
If the US economy cools down next year, the possibility of such a historic surge in the performance of US stock companies will be even smaller. Pioneer Group expects that by 2025, the US GDP will only grow by 1% to 1.5% year-on-year.
The AI revolution will not come immediately
Pioneer Group is not lacking confidence in the potential of artificial intelligence - its research shows that the probability of AI triggering a surge in labor productivity is 45% to 55%. Between 2028 and 2040, this may stimulate a real annualized growth rate of 3.1% in the United States.
However, in Davis' view, such growth changes are not achieved overnight.
This means that investors need to abandon the idea that the changes brought about by artificial intelligence will happen immediately. He pointed out that although many tech giants have invested billions of dollars to enhance their position in the field of artificial intelligence, this does not mean that AI investment will reach $1 trillion by the end of next year. In the view of Pioneer Group, only when the expenditure on artificial intelligence reaches around $1 trillion, can it drive economic growth beyond the trend level of about 2% by 2025.
AI investment scale and expectations from 2023 to 2025
By 2025, investment in artificial intelligence will need to increase by 286% compared to this year in order to reach $1 trillion. And this may not happen, which means we are unlikely to experience an AI driven economic boom in 2025, "he wrote.
In fact, some people on Wall Street have warned that even if such a massive investment in artificial intelligence technology does occur, it may not necessarily be a good thing for businesses. BlackRock has warned that investing heavily in artificial intelligence is likely to trigger higher inflation before the productivity growth brought by AI arrives, which could actually weaken corporate profit growth.