This year, artificial intelligence has helped the U.S. stock market reach a string of all-time highs. It has also helped companies like Nvidia Corp., Microsoft Corp., and Apple Inc. make huge profits.
Neil Shearing is the chief economist at Capital Economics. He thinks that interest in AI could also help the S&P 500 index SPX reach a high point of 7,000 in 2025, even though he also sees similarities with the previous “dot-com bubble.”
“The dot-com bubble shows that U.S. stock prices can go up even more,” Shearing wrote in a Monday client note. “And the hope for more multiple expansion fuelled by AI optimism is why we think the S&P 500 may peak at 7,000 next year.”
But the U.S. economy is probably one area where AI will take longer to make a big difference. This is true even though new technologies, like the internet, have been making their way into the economy more quickly than in the past (see chart below).
For instance, it took more than 70 years after it was invented for the steam locomotive to be widely used. Capital Economics says that during the information and communication technology revolution of the 1980s and 1990s, the time it took for use to drop from ten to five years was cut in half.
By the middle of the 1990s, technology’s effects on the economy could be seen. In the second half of the decade, Shearing wrote, U.S. productivity grew at about twice the rate it did in the 1980s.
He thinks that the impacts of AI on the economy will not become clear until the second half of this decade.
Some investors are worried that the hype around AI is making the prices of shares in Nvidia Corp. NVDA, +0.62% and other AI-related companies go up even faster than they should.
In fact, Shearing said that AI seems to be following the “Gartner Hype Cycle.” This cycle shows how people’s ideas about how new technologies will affect them change over time (see chart below).
“At least when it comes to the big picture effects of AI on the economy, we must be getting close to the peak of unrealistic expectations. Shearing said, “This means we will now go through a period of scepticism before we reach peak pessimism and, eventually, the productivity benefits start to show themselves.”
Shearing said that Nvidia’s investors are following a long tradition of trying to get rich off of new technologies before they fully benefit the economy. This makes people less sure about the long-term economic benefits of this AI revolution.
He also said that this kind of worry might explain why Nvidia’s shares have been so volatile lately. From June 20th to June 24th, they dropped over 13%, but they started to rise again last week. According to data from FactSet, Nvidia’s stock didn’t change much on Monday afternoon.
Since the beginning of 2024, the S&P 500 index has gone up almost 15%, ending the day at 5,475.09 on Monday afternoon.
After a strong start on Monday, U.S. stocks ended the week higher. This week will be shorter than usual because of the Fourth of July holiday. According to FactSet, the Nasdaq Composite COMP went up 0.8%, the Dow Jones Industrial Average DJIA went up 0.1%, and the S&P 500 SPX went up almost 0.3%.
