Australian households have experienced a 7.7 per cent surge in wealth over the past year, reaching $18.1 trillion. However, UBS chief economist George Tharenou warns that the increasing proportion of superannuation assets held offshore means any global market downturn will have a more significant impact on the Australian economy than in the past. This concern is amplified by the rapid growth of the AI sector, which some analysts fear is creating a market bubble.
The AI boom has seen companies like IREN, an Australian-based data centre developer, experience substantial share price increases after pivoting to AI clients. IREN, a Nasdaq-listed company, previously focused on bitcoin mining but now rents its data centre capacity to AI customers. This shift has driven its stock up by 1142 per cent in six months. Fund managers like Jens Peers at Mirova are grappling with stretched valuations while needing to maintain performance to meet benchmarks set by regulators for Australian super funds.
Despite bubble concerns, some analysts believe the AI investment is justified by potential productivity gains. Goldman Sachs research suggests that AI investment as a share of US GDP is smaller than in previous technology cycles. Economist Ed Yardeni posits that the current decade could mirror the Roaring Twenties, with technological advances driving economic growth and a surging sharemarket. Yardeni forecasts the S&P 500 could reach 10,000 points by the end of the decade, requiring the US to avoid recession for the next five years.
While the AI bubble presents risks, investors also face the challenge of potentially missing out on market gains if the rally continues. Concerns about tariffs and inflation persist, but corporate commentary suggests the US economy remains relatively robust. The best-run companies continue to see reasonable economic conditions, with balance sheets in good health and support from tax cuts, suggesting the market could continue its upward trajectory.
