Wall Street analysts debate if AI buildout spending slows economic growth

Wall Street analysts are increasingly questioning whether artificial intelligence, the driving force behind the current three-year bull market, might actually be hindering short-term economic growth despite its long-term promise. The debate centers on whether massive AI infrastructure investments are diverting resources from other productive economic activities, creating immediate headwinds even as they build the foundation for future productivity gains.

The big picture: Top economists at major financial institutions are split on AI’s current economic impact, with some warning that the technology’s resource demands may be creating growth gaps in the near term.

• UBS’s Paul Donovan, global chief economist for UBS Wealth Management, argues that AI “potentially lowers current growth by diverting resources,” citing research showing data centers drive up regional electricity prices, leaving consumers with less spending money.
• Morgan Stanley’s Lisa Shalett, chief investment officer for Morgan Stanley Wealth Management, warns the AI rally is in its “seventh inning,” flagging concerns about slowing revenue growth and speculative deal-making.
• Bank of America remains more optimistic, with senior economist Aditya Bhave’s team concluding that AI appears to be a “net positive” for growth based on stronger-than-expected GDP figures.

Key economic tensions: The AI boom is creating competing forces within the economy that complicate growth assessments.

• Energy-intensive data centers are pushing up electricity costs for both consumers and businesses, potentially forcing some economically productive companies to close.
• Former Obama administration economist Jason Furman, now at Harvard, calculated that without data center investments, GDP growth would have been just 0.1% annualized in the first half of 2024, compared to the actual 1.6%.
• However, Bank of America notes that cloud capex spending has grown 50%-60% instead of the expected 20%, significantly exceeding projections.

What they’re saying: Industry experts acknowledge both the promise and the immediate challenges of AI infrastructure investment.

• “AI: it’s what everyone is talking about,” according to Bhave’s team, noting it’s “one of the most frequently discussed topics” in client conversations about growth and productivity.
• “Is AI hurting growth?” Donovan asks, explaining that while AI should boost long-term output, “the exuberance” may be creating short-term resource allocation problems.
• Jeff Bezos, Amazon founder, recently characterized the current situation as “kind of an infrastructure bubble,” though one that “will pay off for years, even generations.”

Market implications: The debate reflects broader concerns about whether the AI-driven bull market can sustain its momentum.

• Morgan Stanley’s Global Investment Committee has flagged challenges in free cash flow growth among “hyperscalers” (major cloud computing companies like Amazon, Microsoft, and Google) and speculative deal-making as key risks.
• BofA analyst Vivek Arya, who covers semiconductors, attributes some concerns to typical “fourth quarter crunch” nervousness, calling it “panic season” when businesses worry about future spending levels.
• The semiconductor sector remains bullish on continued capex spending driving GDP growth, despite medium-term uncertainties.