Monthly Economic Insights
Growth, geopolitics, and the AI bet
April marked one of the strongest months for equities in more than five years, with major indexes rebounding sharply and reaching new highs.
Geopolitical tensions, inflation concerns, and questions surrounding interest rates remain very real, yet markets have largely looked through the headlines and focused instead on the underlying fundamentals.
That stability is being supported by two important forces: strong corporate earnings and accelerating investment in productivity-enhancing technologies, particularly artificial intelligence.
Earnings growth has remained well above historical averages. U.S. earnings are expected to grow roughly 18% over the next year, compared to the long-term average closer to 7%.
Importantly, that strength is not concentrated in a single sector. While technology and AI investment continue to lead, earnings growth has broadened across industries and global markets.
At the same time, the economy itself appears to be shifting. Long-term labor force growth is slowing, but productivity is improving.
Increasingly, productivity, rather than workforce expansion, is the economy's and market's bet that will be the primary engine of economic growth. AI remains a major part of that conversation. While the long-term impact may ultimately be transformative, its near-term effects are still developing. History suggests that new technologies are often overestimated in the short run and underestimated over the long run.
Inflation, however, remains the key variable to watch.
Recent geopolitical tensions and ongoing deglobalization trends could keep inflation moderately elevated for longer than many expected. Market-based inflation expectations have moved back toward 3% in the near term, even as longer-term expectations remain more contained.
For investors, this creates a more nuanced environment. There are legitimate reasons for optimism, but also reasons for prudence. Valuations remain elevated, and markets may have less room for disappointment than in prior years.
Bottom Line
Markets move for many reasons, but today the dominant narrative is technology investment, particularly around artificial intelligence. The question for investors is how much is real and how much is hype.
History suggests the answer is likely both. From railroads to the internet, transformative technologies have often been overestimated in the short term and underestimated over the long term, a concept known as Amara’s Law.
In the longer term, expectations for AI remain significant. Research from the Federal Reserve Bank of Chicago suggests economists and technologists broadly expect AI to boost productivity and economic growth. Median estimates call for GDP growth of roughly 2.5%, modestly above long-term trends, while more optimistic forecasts approach 4% growth.
Some projections also suggest labor force participation could decline from approximately 62% today to 55% by 2050, with AI potentially accounting for nearly half of that decline, the equivalent of roughly 10 million jobs over time.
But what about today?
Inflation expectations have continued to move higher this year, with one- and two-year expectations now near 3%, while longer-term expectations remain closer to 2.25%–2.5%.
That leaves markets balancing two competing forces: persistent inflation pressures and the long-term promise of AI-driven productivity gains.
For now, markets appear willing to look through the near-term uncertainty. Strong earnings growth, resilient economic activity, and continued investment in AI infrastructure continue to support equities, even as inflation and geopolitical risks remain elevated. The key question ahead is whether productivity gains can ultimately outpace inflation pressures and support a new phase of sustainable economic growth.
The message is clear: diversification is working, and leadership is broadening, and those are encouraging sign for long-term investors.
Invest well. Be well.
— Rusty Vanneman, CFA®, CMT®, Chief Investment Officer (CIO), FNBO Wealth