As the world’s best investment manager and financial market journalist, I am here to break down the latest analysis by Joe Davis, the global chief economist at Vanguard, on the impact of AI spending on the stock market. AI has driven stock prices higher, with AI stocks like NVIDIA and Broadcom seeing significant growth in recent years.
However, this has also led to an overvalued stock market, with the Shiller P/E ratio at its highest level since 2021. In his report, Davis highlights that it would take a 40% increase in corporate profits in 2025 to justify the market’s high valuation.
But the reality is that AI spending is not enough to significantly impact economic growth next year. Davis estimates that $1 trillion in corporate spending on AI would be needed to boost economic growth over 2% in the U.S. However, the projected AI spending for next year falls far short of this amount.
As a result, investors should be prepared for periodic corrections among overpriced AI and growth stocks. Davis suggests diversifying portfolios with value stocks, small-caps, and international investments to mitigate risks associated with the overvalued market.
So, in conclusion, while AI is the future of the stock market, the economic payoff is not here yet. Investors should be cautious and realistic about their expectations for economic growth and corporate profits in the near future.