Mark and Elise Levy’s July Economic Update

The big buzzword of the day is Artificial Intelligence (AI). While some are drawing parallels between the current period and the late-1990s tech bubble and concluding that a decline may be coming, that’s not our view at all. This market environment is very different, given who is leading the charge – the highest quality, most profitable companies in the world – and much lower valuations. Still, we think this history lesson can be instructive. The internet buildout took several years to play out, suggesting this buildout and its impact on stock prices may still only be in the early-to-middle innings. Now, that doesn't mean technology stocks are going to continue to surge for years to come. There are many other important factors that matter, besides AI. A likely path for markets, we believe, is a pullback or mild correction in the second half, offering investors the opportunity to buy on dips.

The AI boom is a positive for equity markets for several reasons. First, it has sparked a wave of capital investment for companies trying to take advantage of these exciting new capabilities. Second, that investment will likely boost productivity for corporate America, lifting profit margins (more revenue without adding more people). And third, productivity gains allow the economy to grow with less wage inflation, keeping interest rates down and supporting stock valuations. This is the “perfect storm” that drove the massive stock market rally in the late 90s. The Diffusion of New Technologies phrase, is the title of a recent working paper at the National Bureau of Economic Research, authored in part by the esteemed Nicholas Bloom of Stanford University. He is one worth watching because of his influence on business executives across the country, on the role of work in the post-pandemic world.

There are a few reasons why business investment in disruptive technologies has a lasting impact on economic growth, productivity, and capital markets. First, new technologies tend to be geographically located at incubators and highly concentrated in just a few regions of the country. As Professor Bloom suggests, most of the disruptive technologies are in Silicon Valley and the Northeast Corridor. But eventually, technologies slowly permeate the broader economy. Second, the impact on the job market from new technologies could take “around 50 years to disperse fully” according to Stanford University research. Third, as technology becomes more standardized within business applications, job openings become available to more than just high-skilled workers, thereby creating opportunities among the broader workforces.

In fact, tech advancements from during the baby boomer generation illustrate the persistent impact on job opportunities. Roughly 60% of job titles in recent years did not exist in 1940. So instead of thinking AI will shrink the job market, we should rather expect AI to enhance the job market. Between 2002–2019, highly disruptive technology skills were mentioned in 141,633 job postings on average, whereas the least disruptive skills were rarely mentioned. The point of the research is to show that potentially ground-breaking technology comes out strong and seems to have a sustained impact, even for generations to come. So, it is fair to say interest in ground-breaking tech stocks is here to stay for the long term, despite our belief that market volatility may increase in the near term.

~Mark and Elise

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