There are a number of reasons to be nervous about the global economy. Since Donald Trump became the 47th US president last January, he has used the threat of tariffs to reorder world trade flows, which will weigh on growth over time, and he has set off a series of disputes with trading partners.
Yet markets have soared to record levels. This is largely explained by the fact that seven stocks; Google, Amazon, Facebook, Apple, Nvidia, Microsoft and Tesla, comprise roughly one-third of the market value of the S&P 500.
This concentration is largely down to insatiable investor demand for companies with exposure to artificial intelligence.
Late on Wednesday, Nvidia, the US tech firm with a significant focus on the AI sector, reported a 56 per cent jump in second quarter earnings to $46.7 billion. The company is valued at $4.4 trillion, which means that if it were a country, it would have the 5th largest economy in the world.
RM Block
Planned investment in AI infrastructure is forecast at $3 trillion over the next four years, underpinning market hopes of its transformative impact. But the evidence so far is mixed. The Massachusetts Institute of Technology (MIT) released a report last week which found that 95 per cent of AI pilot programmes had failed to generate any revenue. Also, Sam Altman, the founder of OpenAI, compared AI to the dotcom boom of the early noughties. He said that while the core technology supporting AI is real, investors may be reading too much into its overall impact.
It remains to be seen whether the AI boom is a bubble and, if so, whether it will burst. As an open economy with a large exposure to the tech sector, Ireland would be highly vulnerable were this to happen. Fears of a transatlantic row over digital technology regulation have also been raised by recent comments from the US president, again with potentially serious implications here.
As they frame the October budget, ministers need to factor in these risks and realise that in an uncertain world, room for manoeuvre in the public finances is invaluable.
