Stocks will tumble much further as AI investment will slow next year then fall in 2028 and drag GDP down too, economist predicts

Recent stock market turmoil is set to intensify as investments in artificial intelligence (AI) wane, warns Capital Economics economist Vicky Redwood, according to a report. The company forecasts that AI investment will peak this year, doubling from the previous year's spending, and could reach over $1 trillion by 2027. However, Redwood believes that annual revenue generated from external customers would need to increase tenfold by 2030 to justify such expenditures.

The economist warns that this could lead to a significant slowdown in AI investment by 2028, with a potential 10% drop in capital expenditures. This slowdown is estimated to shave around 0.1% off U.S. GDP growth, though this is a minor impact compared to economies in Asia. Redwood predicts that the S&P 500 will drop around 12% by the end of 2027, falling 17% below its October peak.

She believes the economic slowdown will be mitigated by the ongoing AI integration into the economy, which will continue to improve productivity despite the capex reduction. Redwood estimates AI will increase U.S. productivity by about 1% annually for several years. While she does not foresee a major economic downturn, she anticipates AI investment will adjust to a more sustainable pace, maintaining sufficient capacity to support future growth in AI usage.