The bull case for the US economy, and the stock market, this year has been outlined on numerous occasions. Clearly, many of the important factors that drove US equity markets to new highs in 2024, will remain in place next year. The outstanding stock market performance of 2024 is unlikely to be replicated in 2025 but could still see solid gains. However, the downside risks for equities will grow in the coming years.
Explosive growth of new hyperscale data centres is creating an insatiable demand for power that will exceed the ability of utility providers to expand their capacity fast enough. AI could quickly run up against supply constraints, and the rapid build out of data centres is already pushing up electricity bills for consumers. Some of the more optimistic assumptions around the rapid growth of AI will then come into question.
At the same time, AI will continue to drive emissions higher, accelerating climate change. 2024 was the hottest year on record, with fossil carbon dioxide emissions hitting a new record high. Many of the tech giants are now missing emissions targets by a long way. A rapidly warming climate favours the occurrence of many of the natural catastrophes observed this year. To the extent that AI accelerates climate change, it will also serve to reduce the supply side of the economy. This makes the case for productivity gains at the aggregate level more difficult to make.
