The current surge in artificial intelligence (AI) is not just a boon for the stock market, but it’s increasingly being viewed as a potential solution to pressing economic issues. Ruchir Sharma, chair of Rockefeller International, highlighted this perspective in a recent Financial Times column, pointing out the dramatic shifts in the U.S. labor market driven by an “immigration boom-bust cycle.” In 2023, the U.S. witnessed a net gain of over 3 million immigrants, but that number is expected to plummet to just 400,000 this year—a shift that could significantly reduce the nation’s growth potential by more than 20%.
Despite the considerable reduction in workforce size, the prevailing sentiment appears to be one of resignation, as many believe that AI advancements may diminish the need for human labor altogether. Sharma noted that this detachment could undersell the risks posed by the shrinking labor pool.
Adding to the financial concerns, the U.S. debt-to-GDP ratio has reached alarming heights, currently exceeding 100% and projected to escalate further—potentially surpassing the record levels seen during World War II in the coming years. However, Sharma posited that AI could catalyze economic growth sufficient to stabilize this burgeoning debt. He indicated that the global bond market seems to be anticipating this scenario, evidenced by rising yields in countries like Japan, France, and the U.K., even with their relatively smaller budget deficits compared to the U.S.
Sharma emphasized that AI is being hailed as a “magic fix” due to its anticipated capacity to significantly boost productivity, particularly within the U.S. economy. Additionally, there are expectations that AI might alleviate inflation pressures. This includes enabling companies to improve wage levels while maintaining stable prices—potentially mitigating tariff-related inflation risks.
The Congressional Budget Office projected that even a modest annual increase of 0.5 percentage points in productivity over 30 years could significantly alter the trajectory of publicly held debt, lowering forecasts from 156% to 113% of GDP by 2055. In fact, the United States has experienced greater productivity growth in recent years compared to other developed nations, fueling optimistic projections from investors about sustaining this lead.
This prevailing narrative around AI has led global investors to re-engage with U.S. markets, rebounding from the turmoil caused by former President Donald Trump’s trade wars. In the second quarter alone, foreign investments surged, with $290 billion pouring into U.S. stocks, culminating in foreign ownership of 30% of the market.
However, there are warning signs. While AI-related stocks have driven substantial market gains, excluding these from calculations reveals that European markets have outperformed the U.S. during this decade. Sharma cautioned that this reliance could spell trouble if AI does not deliver on its promises.
Further echoing these concerns, Lisa Shalett, chief investment officer for Morgan Stanley Wealth Management, observed that the dominance of AI-related stocks has disproportionately influenced market metrics since the introduction of ChatGPT. These stocks have contributed around 75% of S&P 500 returns and over 80% of earnings growth, pointing to a heavy dependency on AI-driven capital expenditures.
Despite the warnings, Wall Street has largely embraced the AI wave, as illustrated by the market rally fueled by OpenAI’s recent investment in chipmaker AMD. Analysts are also raising expectations for leading AI companies like Nvidia and the S&P 500 index itself, though recent record highs have rekindled concerns of a speculative bubble. Some analysts, such as Evercore ISI’s Julian Emanuel, now assess a 30% possibility of the S&P 500 reaching 9,000 by the end of next year under a “bubble scenario,” an increase from a previous 25% estimate.
In summary, the optimism surrounding AI continues to drive both market expectations and economic analyses, but the significant reliance on this technology poses risks that may lead to instability if the anticipated benefits do not materialize.
