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Artificial Intelligence Disruption and Market Volatility

Optimistic vs. Pessimistic Scenarios for AI and the Economy

It’s not the change; it’s the pace of change that is causing discomfort among investors. In these conditions, the best course of action can feel the most challenging – stay the course.

The social and economic questions around artificial intelligence are not yet answerable. Some AI experts predict great power by the next decade – a world in which computers represent the bulk of global intelligence. Others believe AI will never live up to its promise and that the massive capital spending on data centers will ultimately be wasted investment.

It is certainly reasonable to entertain an optimistic outlook. In the past, the creative destruction of new technology eliminated entire job categories and companies, but in the end, improved productivity and created more and better-paying jobs, more exciting businesses and higher living standards. We lost Kmart, Sears and JCPenney to the rise of the internet, along with a host of dot-com start-ups, but gained Amazon and eBay, while legacy powerhouses like Walmart, Home Depot and Costco thrived. We expect similar outcomes this time around, with both the losers and long-term winners coming from the old economy and the new.

However, AI appears to be so powerful, so pervasive and improving so fast that it is also reasonable to consider pessimistic scenarios in which jobs are eliminated far more rapidly than new jobs are created. And the economic impact of job losses could be more negative if they are concentrated among higher-paid knowledge workers.

Speed of AI Adoption and Its Impact on Markets

Speed is also a factor. For example, AI chatbots have already broken records for mass adoption, although most corporations and consumers  so far appear to be using the technology in relatively limited cases. If adoption continues to deepen and broaden and the pace picks up, both the positive and negative impacts will intensify.

No one really knows how this is going to pan out, so the market is reacting with increasingly wild swings. As of writing, the aggregate level of the stock market has not been negatively affected for long by AI concerns, but under the surface there is unusual turmoil across individual stocks and sectors as various future scenarios are considered.

Geopolitical Shifts and Investment Strategy

As for geopolitics, we are witnessing a seismic shift as China and the United States compete for economic supremacy – and the leadership of the United States redefines its role in the world and its relationships with longstanding allies. Proxy regional conflicts are breaking out and trade relations are shifting.

The market has so far responded only in a limited and measured way to most of these events, apart from the plunge on the so-called Liberation Day, and even that was short-lived. The resilience of the U.S. economy and corporate profit growth, remain more significant to investors than the uncertainty caused by erratic foreign policy.

As fundamental investors, we continue to believe that assessing the current and long-term business prospects of companies is paramount. This includes understanding the depth and breadth of a business’s economic moat, or sustainable competitive advantage. This may be harder to assess than in the past, making an investor’s view of the quality of management – their judgment and agility in decision-making, especially around capital allocation – more important than ever.

Pairing fundamental investing in public and private companies with tax-aware or tax-managed passive investing is also appropriate. Today’s index investor is likely to eventually gain exposure to both legacy company winners and new economy winners, including those private companies like Anthropic, OpenAI and SpaceX, which are expected to go public and be added to the S&P 500 in the coming years.

It is also important to make the necessary structural changes to portfolios without excessive trading. We are constantly reviewing our individual holdings and public equity, public credit and private market managers to assess management’s ability to adapt to the rapid changes. We are rebalancing our international weightings to increase diversification and take advantage of the relatively lower valuations as the earnings outlook improves.

It’s also important to note that we expect the earnings growth rate of the international markets to rival that of United States for the first time in many years, and for the gap in valuations to narrow.

In this era of high uncertainty, it is essential that an investment portfolio be not just well diversified but also resilient. The two hallmarks of a resilient portfolio are an adequate level of cash equivalents to cover any spending requirements and low levels of debt both at the portfolio level and on the balance sheets of the various investments. Our portfolios are designed to withstand market stresses while positioned to benefit from the resulting opportunities.

John Apruzzese is the Chief Investment Officer at Evercore Wealth Management; Brian Pollak is the Chair of the firm’s Investment Policy Committee. They can be reached at, respectively, [email protected] and [email protected].