AI spending boom will reverse, dragging stocks and growth down

The AI spending surge is unsustainable

Hyperscalers will spend eight hundred billion dollars this year, double from last year, and invest an estimated one trillion or more in twenty twenty-seven.

Revenue cannot justify the investment

Capital Economics Chief Economic Adviser Vicky Redwood calculated that AI revenues from external customers would need to explode by ten-fold by twenty thirty to justify all that spending.

Investment will slow then fall sharply

Redwood expects AI investment to continue rising next year but at a slower pace, then fall outright in twenty twenty-eight by around ten percent.

Stock market will price in the decline early

Redwood expects the S&P five hundred will be twelve percent below its current level by the end of twenty twenty-seven, putting it seventeen percent off its early October peak.

“We expect considerably larger falls in tech-heavy indices.”

GDP growth will slow but avoid recession

A ten percent capex drop might take zero point one percent off US GDP. Redwood wrote the bottom line is slower GDP growth in twenty twenty-eight but not a major downturn.

AI productivity gains will continue

Despite the capex decline, AI will continue improving productivity through infrastructure already built and new investment at a slower rate.Redwood estimated AI will increase US productivity by about one percent per year for several years.