Bob Elliott, the former Bridgewater Associates executive and CIO of Unlimited, says the rally in artificial-intelligence stocks is built on an economic scenario that depends on unprecedented productivity growth, aggressive household dissaving and a circular flow of capital among technology companies.
The market, Elliott said, is experiencing an “expectations mania.” The problem isn’t that the economy is weak or that corporate earnings have disappointed. Rather, investors are pricing in an extraordinary outcome several years into the future—particularly across semiconductors, AI infrastructure and mega-cap technology stocks.
Consensus analyst estimates call for earnings growth of about 25% a year over the next five years.
“What that means over a five-year time frame is we would have the best five-year earnings growth by a good chunk of any period over the course of the entire post-World War II era,” Elliott said.
The Margin Expansion Paradox
That forecast requires a demanding combination of sales growth and margin expansion. Even assuming nominal revenue growth of 10% annually, companies would still need to expand profit margins by roughly 1 to 1.5 percentage points a year to produce 25% earnings growth.
However, margins don’t emerge from nowhere. Elliot argues that they’re the counterpart of labor income, financing costs, or input prices. If businesses increase margins by reducing labor’s share of income, households have less money to spend. Maintaining consumption would then require consumers to draw down their savings.
The bull case also assumes a productivity surge that has not yet appeared in national data. “Imagine 2% inflation and 10% nominal growth, that’s 8% real growth,” Elliott said. “On a zero-growing labor force, that’s 8% productivity growth. To be clear, that has never happened in any economy in history.”
The $5 Trillion AI Financing Loop
$5 trillion over five years and then “back solving” the revenues and productivity gains needed to justify it. Current annualized AI revenue, by comparison, is roughly $130 billion to $150 billion, he said.
Reaching the scale required to support the investment would mean generating a multitrillion-dollar annual revenue stream. Yet, industry’s interdependence complicates that calculation.
Microsoft Corporation’s (NASDAQ:MSFT) cloud business benefits from spending by OpenAI, while OpenAI remains loss-making. NVIDIA Corporation (NASDAQ:NVDA), Microsoft, Alphabet Inc. (NASDAQ:GOOG) and model developers are linked through a web of investment, contracts and computing demand.
“In the financial crisis, one of the things that really brought down the whole banking system was that everyone was connected with everyone else,” Elliott said. “The problem is we’ve basically recreated a similar type circumstance.”
Real-Economy Test, Crowded Trades and Portfolio Defense
The ultimate revenue, he argued, must come from the real economy, taking the legendary cereal producer Kellogg’s as an example.
“Ultimately, there has to be Kellogg’s,” Elliott said. “You can’t just have OpenAI talking to Microsoft, talking to NVIDIA, talking to Google. Those are all service providers to the real economy.”
He also disputes the idea that hyperscaler capital spending is the primary driver of U.S. growth. Annual spending of $600 billion to $700 billion would equal about 2% of gross domestic product, while many high-value components are imported from Taiwan and South Korea.
Household spending remains more important: Income is growing about 3.5%, while consumption is rising 6% to 7%, implying continued dissaving.
“Right now the savings rate’s 3%,” Elliott said. “They’d have to move their savings rate to something like -15% over the course of the next five years.”
With semiconductor positions crowded across retail investors, hedge funds and leveraged vehicles, Elliott urged investors to look beyond the AI trade. He favors inflation-protected Treasury securities offering about 3% real yields, gold as a hedge against currency debasement (through physical ETF exposure), and value opportunities in Europe, Japan and biotechnology.
“Concentrated hype” may still produce gains, he said, but diversification away from it could offer better long-term risk-adjusted returns.
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