Vanguard Group: Market's Expectations for AI Driving Economic Growth Are Too High, US Stock Valuations Are Unreasonable
Vanguard Group's Chief Global Economist Joe Davis stated that the market's expectations for AI driving economic growth are overly optimistic, believing that even if AI prospers as expected, stock market valuations are still too high. He pointed out that U.S. corporate profits must grow by an average of 40% annually over the next three years to support current stock prices, while this year's actual profit growth is only 10.9%. Vanguard Group predicts that the U.S. GDP growth rate in 2025 will be only 1% to 1.5%. Despite being optimistic about the long-term potential of AI, they hold a pessimistic view on supporting overvalued stocks in the short term
According to the Zhitong Finance APP, as technology companies continue to push the boundaries of artificial intelligence, the market's enthusiasm for this technology seems boundless. However, Vanguard Group stated on Thursday that this enthusiasm for the technology is too high and hopes to see results in a short period of time.
Wall Street is filled with optimistic forecasts on how artificial intelligence will impact the economy and corporate profits, with most predictions based on revolutionary changes in the American workplace and a surge in productivity. This optimism has driven a strong rally in the stock market, with the S&P 500 index up 18% year-to-date as of Thursday.
However, Vanguard Group's Global Chief Economist Joe Davis believes that the market's expectations are too optimistic, and even if the prosperity of artificial intelligence materializes as expected, stock market valuations are still too high.
He estimates that U.S. corporate profits must grow by 40% annually over the next three years to justify current stock prices. In comparison, according to FactSet data, as of the second quarter of 2024, the S&P 500 index had a profit growth rate of 10.9% over the past year.
"I am optimistic about the long-term potential of artificial intelligence to drive worker productivity and economic growth," Davis wrote. "But I am pessimistic about whether artificial intelligence can support overvalued stocks or save us from an economic slowdown this year or next. This is twice the annualized growth rate during the electrification of the 1920s, when electricity not only illuminated the nation but also ignited economic output and corporate profits."
If there is an economic slowdown next year, such a surge in corporate performance seems less likely. Vanguard Group expects U.S. Gross Domestic Product (GDP) to grow only 1% to 1.5% in 2025.
This does not mean that the investment firm lacks confidence in the potential of artificial intelligence - its research suggests a 45% to 55% probability of artificial intelligence sparking a boom in labor productivity. This could lead to an average annual economic growth rate of 3.1% in the U.S. from 2028 to 2040.
But investors need to let go of the fantasy that this change will happen immediately, Davis said. While companies have invested billions of dollars to establish a leading position in the field, some market participants mistakenly believe that artificial intelligence investments will reach $1 trillion in the short term.
He said, "Achieving $1 trillion in artificial intelligence investments by 2025 would require a 286% growth. This may not happen, meaning we are unlikely to experience an artificial intelligence-driven economic boom by 2025."
Some on Wall Street are even more pessimistic. BlackRock has stated that large-scale artificial intelligence investments are likely to trigger higher inflation before any production boom occurs. This could erode corporate profit growth