As the current bull market approaches its third anniversary, financial experts are increasingly debating whether artificial intelligence (AI) is genuinely contributing to economic expansion or creating distortions that could undermine broader growth. While some analysts view AI as a powerful engine for productivity, others caution that its immediate economic impact may be more complex than commonly assumed.
Aditya Bhave, senior U.S. economist at Bank of America Research, noted that AI dominates client conversations, particularly regarding its implications for productivity and employment. His team found no evidence of widespread job displacement, especially in white-collar sectors, suggesting that efficiency gains are currently outweighing labor market disruptions. “The productivity story seems to be winning, at least so far,” they concluded.
However, skepticism persists. Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, expressed concern over speculative enthusiasm surrounding AI, describing the market rally as being in its “seventh inning.” The firm’s Global Investment Committee highlighted risks including stagnant free cash flow among major tech firms, excessive merger activity, and slowing revenue growth in core business segments.
Paul Donovan, global chief economist at UBS Wealth Management, posed a critical question: “Is AI hurting growth?” While long-term investments in AI infrastructure—such as data centers—do stimulate construction and tech employment, Donovan argues that short-term consequences may offset these benefits. He cited research indicating that rising electricity demand from data centers drives up regional power prices, reducing disposable income for households and increasing operating costs for energy-intensive industries. This shift could force some productive businesses to scale back or close, creating a gap in overall economic performance.
Shalett added another layer to the discussion, pointing out that many new AI-driven companies are not experiencing rapid growth. Factors such as market saturation, monopolistic tendencies in digital advertising and search, and price wars among cloud providers are limiting expansion. She also warned investors about excessive venture capital flowing into unproven, unprofitable startups, advising caution in small-cap tech exposure.
Despite these concerns, Bank of America’s analysis remains optimistic. They point to stronger-than-expected GDP growth in the first half of 2025, which reached an annualized rate of 1.6%, surpassing even their own projections. This resilience occurred despite challenges like the first-quarter import shortfall caused by tariff disruptions. Investment in AI-related infrastructure, particularly semiconductors and cloud computing, is seen as a major growth driver.
Vivek Arya, Bank of America’s semiconductor analyst, emphasized that capital expenditures in cloud infrastructure have far exceeded expectations—growing by 50% to 60% in 2025, compared to initial forecasts of around 20%. However, uncertainty looms over future spending, a pattern Arya describes as recurring “panic season” in financial markets.
Harvard economist Jason Furman offered a counterfactual analysis: if data center investments were excluded, first-half 2025 GDP growth would have been just 0.1% on an annualized basis. He acknowledged that absent the AI boom, lower interest and energy costs might have stimulated growth in other sectors, potentially offsetting about half of AI’s contribution. Ultimately, the relationship between AI and macroeconomic performance remains nuanced and multifaceted.
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The bull market is turning 3 years old and top analysts are wondering, is AI actually good for economic growth?
“It seems you can’t go anywhere without talking about AI,” according to Aditya Bhave, senior U.S. economist at Bank of America Research, whose team tackled the subject on Friday. “AI: it’s what everyone is talking about,” they said. n nIn BofA’s client discussions, according to Bhave’s team, “one of the most frequently discussed topics is AI and what it means for growth, productivity, and the labor market.” They concluded that they have not found evidence of AI usage leading to job losses, especially across white-collar occupations. “The productivity story seems to be winning, at least so far.” Morgan Stanley Wealth Management’s Lisa Shalett and UBS’s Paul Donovan aren’t so sure. n nLisa Shalett, chief investment officer for MS Wealth Management, previously told Fortune she was “very concerned” about bubbly conditions around AI, and reiterated in an October 1 research note that the rally is in its “seventh inning.” Morgan Stanley’s Global Investment Committee flagged three concerns on their mind as the ballgame nears its end: challenges in free cash flow growth among the so-called “hyperscalers,” speculative deal-making and, finally, “slowing growth in key revenue segments.” n nPaul Donovan, global chief economist for UBS Wealth Management, wrote on Friday that a simple question is haunting markets: “Is AI hurting growth?” He noted “the exuberance” around it, which “should be based on an expectation that investing today will generate higher economic output in the future,” and in that sense, AI is surely good for long-term growth. The problem, in other words, is closer to home, in those last two innings Shalett has been worrying about. n nGrowing debate among experts n nDonovan’s analysis includes boosts to growth from the now-archetypal data center leading to economic activity from construction workers, programmers and so forth, which have helped lift U.S. growth. “But AI potentially lowers current growth by diverting resources,” he said. For example, he cited research by Bloomberg showing that as regional electricity prices are pushed higher by the power needs of data centers, the spiking bill for consumers results in less money to spend elsewhere in the economy. Likewise, energy-intensive businesses will face higher costs, too. This risks “creating a gap in the economic growth story,” Donovan said, because this dynamic could force some currently economically productive businesses to close. In other words, does the local small business have to die so the data center can live? n nMorgan Stanley’s Shalett flags a different concern, that even the supposedly dynamic new AI-based businesses just aren’t growing so fast right now. She blames “market saturation or monopolies—as seen in search and digital advertising—and increasing competition,” citing cloud services, where new entrants are competing on price in a battle for market share. She’s also worried about huge amounts of venture capital flocking to fledgling business models, and advised investors to rethink their exposure to small-cap and unprofitable tech firms. u200b n nBhave’s team is generally more bullish. While allowing that risks aren’t off the table in the medium term, they argue that for now at least, AI appears to be a “net positive” for growth. Just look at the GDP figures from the first half, which surprised even BofA’s relatively optimistic expectations. The rebound to an annualized rate of 1.6% is “particularly resilient considering the missing imports problem” in the first quarter due to the Trump tariff shock, which “blurs the picture” a bit. Investment in AI is just a huge force driving the economy forward, they say. n nBhave’s team cited senior analyst Vivek Arya, who covers the semiconductors sector, and his bullish call that despite concerns about the medium term, capex spending will still power GDP growth. Arya previously told Fortune in an interview that he thinks jitters have to do with this particular time of year, the fourth quarter crunch as most businesses start thinking about what’s around the bend. Economist Owen Lamont calls it “panic season” in markets and Shalett herself noted the S&P 500 has recently managed to defy the “September curse” of historically poor performance, delivering a nearly 3% gain. n nArya told Fortune that BofA has seen “in prior years right around this time … people get justifiably very nervous about what is going to be the amount of spending next year.” In the start of 2025, he added, clients expected cloud capex to only grow about 20% or so, but thats been blown out of the water with 50%-60% growth instead. “But now it’s the worry again for next year and the year beyond that.” n nAnother voice is former Obama administration economist Jason Furman, on the faculty at Harvard, who calculated in late September that without data centers, those GDP figures would look a bit different. Subtracting all that capex results in a growth of just 0.1% on an annualized basis for the first half of 2025. To Donovan’s point, some other productive activities would have taken its place, Furman added: “Absent the AI boom we would probably have lower interest rates [and] electricity prices, thus some additional growth in other sectors. In very rough terms that could maybe make up about half of what we got from the AI boom.” Still, the question of AI and growth isn’t a straightforward one.