Economy will pop with AI bubble

The old truism that the stock market is not the economy risks underplaying how much today's powerful investment trends could impact the prosperity and lives of the whole country.

- Mike Dolan

A Reply humanoid robot demonstration at Italian Tech Week in Turin, Italy, on Friday.

(BLOOMBERG)

Artificial intelligence (AI) is obviously the megatrend of the moment. Scale is everything, and the US tech giants are driving the spending, while investors are scrambling to get on board an already overcrowded train.

The so-called Magnificent Seven - US tech companies that now make up a record 36% of the S&P 500's market value - have seen their stock prices more than double over the past two years, after rebounding a whopping 60% from the troughs of this year.

Whether this is a bubble is perhaps the biggest question facing the stock market and the US economy at large.

While the extraordinary capital expenditure on AI over the past year may only represent about 1% of US GDP, its impact on growth has been massive.

Some reckon as much as one-third of the economy's near 4% annualised expansion over the past two quarters may be accounted for by this digital gold rush. Tariff-related trade distortions have played havoc with GDP calculations this year, but last week's revisions showed that business spending on intellectual property products grew 15% compared with a 12.8% previous estimate, while firms' investment in equipment grew at an 8.5% clip instead of the previously reported 7.4%.

That growth may have slowed a bit this quarter, but not much.