Yet again, Nvidia (NASDAQ:) delivers another incredible earnings report, reinforcing that the AI investment boom continues. As we show below, they posted annual revenue growth of of 73%, handily beating Wall Street forecasts. Most importantly, strong earnings and robust forward guidance confirm that their customers continue to aggressively expand AI infrastructure. Nvidia delivers the critical computing backbone behind the global AI arms race. Think of them effectively as a toll collector on one of the largest capital spending cycles in modern history.
While Nvidia is collecting hefty tolls, i.e., profits, and expects to do so for the foreseeable future, the market is growing increasingly concerned about funding for the AI revolution. The company’s earnings strength comes from unprecedented capital expenditures by a relatively small group of customers financing massive data-center expansion. As economist Carlota Perez wrote about past technological revolutions, and as discussed , innovation itself is rarely the bubble—the financing surrounding innovation often becomes the problem. Nvidia delivers confirmation that AI is transformative, but recent weakness in AI stocks, including a lackluster market response to Nvidia earnings, suggests markets are worried that capital to finance the massive data center expansion is becoming more dear.
“Financial capital is by nature footloose, impatient, and speculative, while production capital is tied to the long-term accumulation of capabilities.” — Carlota Perez, Technological Revolutions and Financial Capital
What To Watch Today
Earnings
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Economy
Will AI Flummox The Fed?
There are grave concerns that AI will displace jobs, resulting in a steadily rising . At the same time, the productivity benefits of AI threaten to reduce , quite possibly below the Fed’s 2% target. Those pose a potential problem for the Fed, which is congressionally mandated to maintain “stable prices” and “maximum employment.”
Monetary policy works by adjusting aggregate demand—raising or lowering borrowing costs to slow or stimulate economic activity. However, AI-driven job losses and disinflation or deflation might be much harder to influence than traditional economic activity. Companies adopting AI-driven automation are doing so to improve productivity and reduce labor costs, regardless of interest rate levels. In such an environment, lower rates may stimulate spending or asset prices, but they cannot easily reverse technological substitution. The Fed can influence hiring at the margin, but it cannot prevent firms from replacing tasks that machines or algorithms can perform more efficiently.
In the future, AI may make the Fed’s policy decisions far less effective. For instance, if AI is resulting in a high unemployment rate, easing monetary policy may boost liquidity without meaningfully restoring employment growth. The result could be an unusual policy environment where financial conditions loosen while labor markets remain weak. Such may be a boon to the financial markets, but has little to no impact on the labor market. Similarly, lower rates to boost inflation may only stimulate asset inflation with little impact on real prices.
The graph below depicts the potential problem facing the Fed. There has been a distinct decoupling of business investment and labor demand.
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