As concerns about an AI bubble grow, economists are examining how a sudden market reversal could affect stocks, the economy, and household finances.
Artificial intelligence has helped send stocks higher and sparked a massive wave of spending on data centers, computer chips, and other technology. But as more money pours into AI, some economists are warning that excitement around the technology may be creating a bubble, with both stock prices and spending climbing faster than future profits can support.
There are several other reasons for concern:
- Stock valuations—how expensive stocks are compared with company profits—have climbed near dot-com bubble levels, according to Capital Economics.
- Expectations for future profit growth are unusually high, especially considering the huge amounts of money companies are borrowing to fund expanding AI operations.
- Rising interest rates could make borrowing even more expensive, further cutting into company profits.
- The stock market has become heavily dependent on a relatively small group of large technology companies.
A bursting AI bubble could hurt more than technology companies. Rising stock prices have helped boost household wealth and consumer spending, while AI-related projects have become an important source of business spending and economic growth. Fitch Ratings recently examined a scenario in which AI stocks fall 35% over six months. The firm found that such a decline could push the United States toward recession, leading companies to cut spending, unemployment to rise, and consumers to spend less.
What would begin as a drop in technology stocks could eventually reach American businesses, workers, and households. That possibility is one reason some people turn to physical gold to diversify their financial holdings and reduce their exposure to stock market turmoil. Because gold’s price is driven by different forces than stocks, it can provide a hedge during periods of economic and market uncertainty.
