AI-Driven Economy Faces Productivity Hurdle

The stock market continues to trade near all-time highs, but this is not reflected in consumer sentiment, which has been declining for three years. This disconnect can be attributed to the AI-driven economy, where growth is concentrated among a few mega-cap firms investing heavily in technology.

The current boom is driven by AI capex, with estimates suggesting it accounts for over 2% of U.S. GDP, a scale rarely seen outside major historical infrastructure projects. However, this growth needs to translate into broader productivity gains across the economy.

Nvidia, the leader of the 'AI trade', has a current market capitalization of around $5 trillion and is expected to grow its earnings by 20% per year for the next decade. But if we assume labor productivity grows at only 1.75%, Nvidia's share of total U.S. corporate profits would be unsustainable.