The Economic Payoff of AI – A Long-Term Prospect

Caution Advised Amid Enthusiasm for AI Investments

A new analysis highlights the long-term potential of artificial intelligence (AI) while urging investors to approach current market trends with caution.

Key Points

  • Although AI promises substantial benefits for productivity and economic growth, the payoff is expected over a more extended period than some anticipate
  • This comes at a time when AI-driven optimism is contributing to high US stock valuations, raising concerns about market sustainability
  • The analysis reveals that current investment levels in AI, though significant, are not enough to drive immediate economic transformation.

In 2023, US AI investment reached approximately US$67 billion. Even optimistic projections for 2025 put spending at around US$248 billion, far below the US$1 trillion needed to spur major economic acceleration.

Stock valuations, particularly in the growth sector, remain stretched.

Current US market prices are estimated to be 32% above fair value, with earnings growth needing an unprecedented 40% annual increase to align with these high valuations.

Such growth rates, double those seen in past technological booms, are unlikely, especially as US economic growth for 2025 is forecasted to slow to between 1% and 1.5%.

Despite these challenges, the long-term prospects for AI remain promising.

Economic benefits from AI are expected to take fuller shape between 2028 and 2040, as the technology matures and investments yield results. However, near-term gains are limited, underscoring the importance of a cautious and well-diversified investment strategy.

Implications for Personal Wealth

This analysis underscores the importance for our financial planning clients to manage expectations and maintain strategic investment approaches.

While AI has significant potential, its immediate economic contributions may not justify current market highs. Clients are advised to prioritise diversified portfolios, maintain realistic outlooks, and be prepared for possible market corrections.

A long-term, balanced approach that aligns with individual risk tolerance and investment goals remains crucial as AI continues to evolve.

For more information on diversified investment strategies, please contact your Allan Hall Financial Advisor.

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General Advice Warning

The information contained in this article is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs and, where appropriate, seek professional advice from a financial advisor. This site is designed for Australian residents only. Nothing on this website is an offer or a solicitation of an offer to acquire any products or services, by any person or entity outside of Australia. Robin Bell, Martin Cimino, Angelo Adam and Allan Hall Financial Planning Pty Ltd are Authorised Representatives of Consultum Financial Advisers Pty Ltd ABN 65 006 373 995 AFSL 230323. 

Source: 5 Sept 2024. Vanguard Australia FAS. Available from https://www.vanguard.com.au/adviser/learn/insights/markets-and-economy/economic-payoff-of-ai-is-coming