Benzinga and Yahoo Finance LLC may earn commission or revenue on some items through the links below. Bob Elliott, the former Bridgewater Associates executive and CIO of Unlimited, says the rally in artificial-intelligence stocks is built on an economic scenario that depends on unprecedented productivity growth, aggressive household dissaving and a circular flow of capital among technology companies. The market, Elliott said, is experiencing an "expectations mania." The problem isn't that the economy is weak or that corporate earnings have disappointed.
Rather, investors are pricing in an extraordinary outcome several years into the future—particularly across semiconductors, AI infrastructure and mega-cap technology stocks. Consensus analyst estimates call for earnings growth of about 25% a year over the next five years. A single bad hire can set a startup back years.
Here are the 5 hires founders most often misjudge — and why Still Learning the Market? These 50 Must-Know Terms Can Help You Catch Up Fast "What that means over a five-year time frame is we would have the best five-year earnings growth by a good chunk of any period over the course of the entire post-World War II era," Elliott said. That forecast requires a demanding combination of sales growth and margin expansion.
Even assuming nominal revenue growth of 10% annually, companies would still need to expand profit margins by roughly 1 to 1.5 percentage points a year to produce 25% earnings growth. However, margins don't emerge from nowhere. Elliot argues that they're the counterpart of labor income, financing costs, or input prices.
If businesses increase margins by reducing labor's share of income, households have less money to spend. Maintaining consumption would then require consumers to draw down their savings. The bull case also assumes a productivity surge that has not yet appeared in national data.
"Imagine 2% inflation and 10% nominal growth, that's 8% real growth," Elliott said. "On a zero-growing labor force, that's 8% productivity growth. To be clear, that has never happened in any economy in history." Trending: Avoid the #1 Investing Mistake: How Your 'Safe' Holdings Could Be Costing You Big Time $5 trillion over five years and then "back solving" the revenues and productivity gains needed to justify it.
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