AI’s Promise and History’s Lessons

The Global Race for AI Ascendancy Is Heating Up

AI has become central to global competition, with governments prioritizing its development to bolster national security and address long term demographic and fiscal challenges. The United States leads in innovation, while China emphasizes supporting infrastructure and cost-efficient models.

AI Investment Is Fueling Economic Growth, but Exacerbating the Two-Speed Economy

AI investment has emerged as a significant driver of U.S. economic growth, contributing approximately one percentage point to growth in 2025. Equity market gains fueled by AI have bolstered consumer net worth, supporting spending despite labor market softness. However, this growth is deepening economic disparities by crowding out rate-sensitive activities and amplifying sectoral divergences.

Productivity Transformation Will Be Apparent…Over Time

The enduring economic benefit of AI will come from making the economy more productive. Automation could yield large productivity gains, though full realization may take a decade, and estimates range from 2–20 percent. We see mid-range estimates as plausible, suggesting an annual productivity boost of 1 percentage point, a transformative increase on par with past technological revolutions.

Potential Near-Term Disruptions to Labor Should Give Way to New Job Creation

AI adoption is expected to reshape labor markets, with near-term risks of frictional unemployment offset by long-term opportunities for job creation. Historical trends highlight the economy’s ability to generate novel employment categories, and AI’s capabilities may help workers retrain to adapt to the transition.

Our Investment Framework Is Organized Around Four Main Themes

Theme 1: Equity Investments in AI Companies Appear Optimistically Priced

• Equity valuations for leading AI companies are elevated, and while they are supported by strong earnings growth, valuations embed expectations for sustained elevated growth that leaves little margin for error amid rapid technological change and intensifying competition.
• This environment favors broadly diversified portfolios that reduce equity concentration risk and incorporate fixed income to balance equity exposure.

Theme 2: AI Adopters Offer Strong Potential as Valuations Catch Up to Potential Benefits

• Valuations for companies positioned to benefit from AI adoption have not seen comparable increases to AI infrastructure providers, offering investors access to productivity gains without the premiums tied to prominent players.
• Early positioning in successful adopters could yield attractive returns as AI benefits materialize, though execution risks are significant.

Theme 3: Physical Infrastructure Investments Offer High Quality, Contractual Cash Flows

• The physical infrastructure supporting AI deployment, such as data centers and power infrastructure, presents compelling investment opportunities, offering high quality, contractual cash flows.
• This issuance will cross asset-class boundaries, and structures will embed new types of risk, requiring active management and careful selection.

Theme 4: AI Will Play a Growing Role in Interest Rate and Credit Markets

• Strong productivity growth has historically increased business demand for capital, exerting upward pressure on real interest rates. However, potential productivity gains should help keep inflation in check.
• Multi-directional influences on fixed income yields are likely to create an attractive backdrop for fixed income, but investors would benefit from actively managing interest rate and credit exposures.