March 2024
Speculation on the influence of Artificial Intelligence (AI) pervades every corner today. Few industries seem untethered from its potential impact, likewise global productivity. BNY Mellon’s Global Economic and Investment Analysis (GEIA) team outlines its view on the economic implications of the new technology wave.
The hype and excitement of AI is being felt across everyday lives today, but its very real economic impact has only just begun. According to BNY Mellon’s Global Economic and Investment Analysis (GEIA) team, widespread AI adoption may result in a more than 1.5% rise in global productivity growth in the next decade.
In analyzing the AI movement, GEIA economists Jake Jolly and Seb Vismara explored its market and economic impact, outlining in their view probable scenarios. One headline assertion in their analysis is the likelihood of its substantial impact on productivity growth. This in turn could have a positive influence on earnings growth and operating margins, given they are typically correlated to productivity growth (a key driver of GDP growth), the two say.
“Generative AI could potentially spur a new industrial revolution as it can automate and augment many non-routine tasks less impacted by previous innovations.1 Like the steam engine, electrification and computers, AI could fundamentally reshape industrial organization and work.”
While stock markets have already seen gains influenced by the AI story, the GEIA team believes as potential AI benefits become clearer, its market impact may be starker. This could result in boosting the S&P 500 Index over 6,500 in the next few years – up from its position at just over 5,000 today (February 2024), in their view. But like innovations in the past that led markets up, is this just a bubble in the making? Not just yet, say Jolly and Vismara.
They say: “The tech rally seen in markets since November 2022 has been significant but not yet unsustainable. Realized returns are attractive, but not extreme,” they note. However, they add: “Every major innovation since the 17th century led to the formation of a market bubble so at the very least, one should consider the probability of a bubble is elevated.”
Given significant uncertainty around AI adoption/impact, Jolly and Vismara believe it’s more intellectually honest to focus on probability weighted ranges for the equity outlook. “We think an ‘AI-rally sweet spot’ lies between 5,500 and 6,600 through 2025.”
But will it just be tech companies that win from any AI boost? Maybe initially, purports the GEIA team’s analysis. Past innovation cycles certainly bear that argument out, with those directly involved the biggest winners – at least in the short run, Jolly and Vismara say. However, when it comes to AI its application may be broader and which it may benefit and which it may disrupt remains to be fully seen. It may also result in new industries entirely.
“New technologies can fundamentally alter the cost structure of a given industry and the way inputs are combined. This allows for a redefinition in the way goods and services are provided to the public (there is a change in the production function, as economists would say), and new business models emerge.”
Beyond technology, Jolly and Vismara say other beneficiaries of AI could be communication services, financials and healthcare, and at a country level, the US followed by Taiwan/Korea and several European countries.
1 Generative AI refers to AI-created content including text, audio and synthetic data.
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