Not only has the American stock market reached all-time highs this year due to the excitement surrounding artificial intelligence (AI), but tech behemoths such as Nvidia Corp., Microsoft Corp., and Apple Inc. have made significant profits as well. Neil Shearing, the chief economist at Capital Economics, thinks that this optimism around AI could push the S&P 500 index to 7,000 in 2025, which would be a major milestone in market valuation.
Shearing compared the current state of U.S. equity valuations to the dot-com bubble era in a client note on Monday, speculating that future multiple expansions propelled by AI advancements could drive further expansion. The S&P 500 may peak at 7,000 next year, according to Shearing, “because the dot-com bubble experience suggests that U.S. equity valuations can rise further— and the anticipation of additional multiple expansion fueled by AI optimism.”
Comparing AI to previous technological revolutions, some businesses have achieved unprecedented levels of profitability very quickly; however, the broader macroeconomic effects of AI may take longer to materialize. While AI has enormous potential to change the world, Shearing pointed out that it may take longer than other technologies from earlier decades to become integrated into the US economy as a whole, like the internet.
The internet revolution of the 1980s and 1990s saw rapid integration within five to ten years, whereas it took decades for technological advancements like the steam locomotive to become widely used. Shearing observed that by the middle of the 1990s, the financial benefits of these advancements were noticeable, greatly increasing productivity in the United States.
Shearing cited the “Gartner Hype Cycle” as an example of how the public’s perception of new technologies varies, in light of the current market dynamics. He proposed that artificial intelligence might be approaching the apex of exaggerated expectations at this time, which could result in a period of skepticism before real productivity gains materialize.
Investor uncertainty regarding the economic impact of AI is exemplified by the recent volatility in Nvidia’s stock, which saw a notable decline followed by a partial recovery. The S&P 500 has demonstrated resilience in the face of these swings, closing at 5,475.09 on Monday afternoon and posting a gain of almost 15% in 2024.
According to FactSet data, the Nasdaq Composite increased by 0.8%, the Dow Jones Industrial Average increased by 0.1%, and the S&P 500 saw an increase of almost 0.3% as U.S. markets began a shortened week that includes the Fourth of July holiday.
Although AI keeps the stock markets hopeful, there is still reason for concern about its wider economic ramifications. Shearing’s prediction that the S&P 500 may peak at 7,000 captures the enthusiasm and trepidation surrounding the ongoing AI revolution and its implications for the dynamics of the market going forward.
