Moody's top economist pokes holes into sustainability of AI stock rally

Core Insights - Concerns have been raised regarding the long-term sustainability of the AI stock rally, with warnings that the economic momentum driven by rising tech valuations may not be enduring [1][5] - The recent economic expansion is significantly linked to the "wealth effect," where increased household wealth from rising equity markets boosts consumer spending [2][3] - Affluent Americans, whose stock portfolios have increased due to the AI boom, are major contributors to this spending trend [3][4] Economic Impact - The "wealth effect" has contributed nearly 0.5 percentage points to real GDP growth over the past year, accounting for about 25% of total economic expansion [2] - Household wealth is currently approximately eight times after-tax income, exceeding the historical average of 5.5 times from post-World War II to the financial crisis [4] Risks and Market Dynamics - The rapid increase in household net worth relative to income levels raises questions about the sustainability of this growth [4] - Potential risks to future growth are highlighted if stock market gains, especially in AI sectors, begin to decline, amid concerns of a possible bubble [5] - Despite these risks, companies like Nvidia and Palantir continue to perform strongly, even as questions about their high valuations remain [5]