AI-Driven Economy: Productivity Gains Needed to Justify Valuations

The stock market continues to trade near all-time highs, while consumer sentiment has been declining for three years. This decoupling of stocks and sentiment is attributed to the AI-driven economy, which is boosting growth but narrowly across the economy.

Repetitive inflationary shocks have left American households with incomes trailing prices, forcing them to draw down savings. The mid-2020s investment boom is largely driven by a handful of mega-cap firms betting on AI technology.

AI-related investment has reached above 2% of U.S. GDP, an enormous scale of concentrated spending rarely seen outside major historical infrastructure build-outs. However, the justification for high valuations in the AI ecosystem relies heavily on productivity gains.

The Congressional Budget Office projects 1.75% labor productivity growth over the next decade, which would imply Nvidia's share of total U.S. corporate profits to be under 8%. This is a historical anomaly, as no single company has held such a large share of profits since post-World War II.

Recent data shows U.S. labor productivity averaging about 1.3%, consistent with the low productivity backdrop of the 2010s rather than an AI-induced acceleration. Signs suggest technology is struggling to scale, partly due to expensive AI tokens and companies rationing consumption.