Investors are facing a challenging new reality as concerns grow over the potential ramifications of artificial intelligence (AI) on the economy and markets. One significant worry raised by MRB Partners is that the AI boom, rather than being a deflationary force, could lead to higher inflation. In a note to clients, Phillip Colmar, a partner in global strategy at MRB Partners, highlighted that the structural changes brought about by AI could result in increased consumer costs, challenging the prevailing assumption that productivity gains will lower prices.
Colmar emphasized that while many anticipate a future characterized by disinflation due to AI advancements, there is currently no evidence to support this notion. Instead, he argues that the capital expenditure associated with AI infrastructure is pushing up prices for essential goods like electricity and electronic products. He predicts that inflationary pressures stemming from the AI boom are likely to persist for several years before any disinflationary benefits might emerge.
Colmar’s analysis identifies two additional factors contributing to the inflation outlook. Firstly, he points to a positive economic output gap as a percentage of GDP, indicating that the economy and labor markets are operating above their full potential. Secondly, the ongoing trade war in the U.S. is reversing globalization trends, which previously acted to keep prices in check.
According to MRB Partners, many investors have yet to recognize that structurally elevated inflation may be a lasting scenario. Once this reality is accepted, Colmar anticipates a decline in growth stocks and cryptocurrencies—assets he considers to be in bubble territory. Rising inflation typically exerts downward pressure on stock prices, as it tends to lead to higher long-term and short-term interest rates.
Colmar outlined a few signs that suggest growth stocks are currently overvalued, including soaring valuations driven by overly optimistic growth expectations and a disproportionate increase in growth stocks’ market capitalization relative to their profits. The tech industry’s investment levels have also reached heights reminiscent of the dot-com era, amidst fierce competition that leaves firms susceptible to market disruptions.
In response to these inflationary challenges and asset bubbles, Colmar has recommended a cautious approach to growth stocks and cryptocurrencies in investment allocations, suggesting an underweight position in these asset classes. He warns that as market consensus shifts to accommodate a higher inflation environment, it will result in rising policy rates and bond yields, further dampening speculative behaviors across financial markets.
