AI Boom Falters on Productivity Hurdle

The stock market continues to trade near all-time highs, but consumer sentiment has been declining for three years. Historically, stocks and sentiment have moved in tandem, but they have decoupled recently.

The answer lies in today's artificial intelligence (AI)-driven economy. Booming data center construction and tech-related investment is boosting overall growth, but this growth is felt narrowly across the economy.

Nvidia, the leader of the 'AI trade', has a current market capitalization of about $5 trillion. If we make a conservative assumption and say that Nvidia can grow its market cap by 5% per year for the next 10 years, that would bring Nvidia's 2036 market cap to $8.55 trillion.

However, productivity needs to accelerate to justify the AI trade. The current CBO baseline assumes 1.75% labor productivity growth over the next 10 years, but a 3% productivity growth rate seems more achievable. This would be on par with the acceleration in productivity in the late 1990s and early 2000s during the internet revolution.