AI Could Live Up to the Hype and Still Disappoint Investors, Warns Moody's

Moody's Warns of a Muted Decade for AI-Driven Stocks

Artificial intelligence may eventually transform industries and boost productivity — but that doesn’t mean stock investors will reap outsized gains, according to a new analysis from Moody’s. The credit rating agency’s economists, led by Mark Zandi, argue that there is a credible middle path between AI being a revolutionary force and disappointing on a grand scale. In their base-case scenario, AI becomes a powerful economic driver, yet the S&P 500 sees only modest price appreciation over the remainder of this year and next, followed by gradually decelerating annual returns.

The numbers are sobering for anyone expecting a repeat of the recent bull run. Moody’s sees average annual S&P 500 returns declining to 6.2% in the nearer term (through 2030) and then to just 3.8% from 2030 to 2035. Over the full 10-year window from 2025 to 2035, the projected average stands at 5% — less than half the 11.7% annualised return the index delivered between 2015 and 2025. Such forecasts are anchored in a comparison to the internet era: game-changing technology that generated huge productivity and profits, yet valuations ran far ahead of reality, setting the stage for a painful drawdown.

The report highlights that today’s equity valuations have hit extremes seen only a few times before — in the months leading to the 1929 crash and during the dot-com bubble. A key metric flagged by Moody’s: AI-linked corporate borrowing has already surpassed the debt levels witnessed during the internet mania. If a bubble bursts, the knock-on effect could be severe. A steep drop in stock prices would erode the wealth effect that has supported US consumer spending, potentially tipping the economy into recession, Zandi warned.

History suggests that transformative technologies — the internal combustion engine, the personal computer — ultimately raise incomes and create new jobs, even as they disrupt old ones. Moody’s believes AI could do the same. But that long-run prosperity, the report cautions, does not guarantee that current stock valuations will be justified. Even if AI meets lofty expectations, the returns required to please Wall Street may still fall short.

Where AI’s Promise Collides with Valuations

The Valuation Parallel to 1929 and the Dot-Com Era

Moody’s draws a direct line between today’s market and two of the most infamous bubbles in financial history. The S&P 500’s current valuation multiples — prices relative to earnings — have reached territory that previously preceded the 1929 crash and the bursting of the dot-com bubble in 2000. While the firm stops short of calling a top, its economists note that such levels have historically been unsustainable. The implication is clear: even if AI delivers on its economic promise, the market may have already priced in a a best-case scenario, leaving little room for further upside and significant downside risk if sentiment shifts.

How AI Borrowing Is Inflating Risks

One fresh warning sign is the surge in corporate borrowing tied to artificial intelligence. Moody’s points out that AI-related debt issuance has exceeded the levels seen at the peak of the dot-com frenzy. This suggests that companies — and the investors who fund them — are making an unusually large bet on AI’s future profits. If those profits materialise later than expected or prove smaller than anticipated, highly leveraged firms could come under pressure, and the unwind could ripple through credit markets. This dynamic adds a layer of financial fragility that wasn’t present in simpler technology cycles.

Why Even Economic Transformation May Not Boost Stocks

The report’s central paradox is that a technology can revolutionise the economy while delivering subpar stock returns. Moody’s cites the internet as a classic example: it created enormous productivity gains and profits, but stock prices soared so high in anticipation that the subsequent decade delivered lacklustre performance for equity investors. The firm’s base case for AI follows a similar script. The technology changes how businesses operate, lifts overall output, and may even justify high valuations — but from a starting point already elevated by years of hype, future price appreciation is likely to be limited. The risk, as Zandi frames it, is that the final ingredient for a bubble — near-universal capitulation of skeptics — is falling into place, setting the scene for a correction even if the AI revolution unfolds largely as promised.

What Investors Should Watch as AI Hype Meets Reality

• Track AI-related corporate borrowing levels. Moody’s flags that AI-linked debt has eclipsed dot-com-era highs. A further surge in issuance or deterioration in credit quality could signal that the speculative froth is intensifying.
• Compare S&P 500 valuation multiples to historical bubble peaks. Moody’s explicitly references the run-ups to the 1929 and 2000 crashes. If forward P/E ratios continue to climb toward those extremes, the margin of safety for equity investors shrinks sharply.
• Watch for signs of investor impatience with AI returns. The report identifies the possibility that investors may “grow impatient and sell their holdings as long-awaited returns from firms’ AI bets get pushed further into the future.” A string of earnings misses or delays in monetisation could be the catalyst that deflates the bubble.
• Monitor US consumer spending data. Because the wealth effect from high stock prices has supported household spending, any serious market downturn could quickly feed into a pullback in consumption, raising recession odds exactly as Moody’s warns.