ROI-Brutal AI selloff stirs recession fears: McGeever

There are mounting signs that global growth is cooling. An AI-driven stock ​market slump could sharply deepen the slowdown and even tip several major economies into recession. Whether the current selloff snowballs into something ​more serious remains to be seen. Over the past four years, the S&P 500 has ‌only ​experienced one downturn of more than 10% — the plunge driven by President Donald Trump's “Liberation Day” tariff announcement in April 2025. But that was very short-lived.

Currently, the S&P 500 is down only 4% from its recent peak, while the Nasdaq is down 10%. This may turn out to be just the latest in a long line of “buy the dip” opportunities in the AI revolution that ultimately leads to new highs on ‌Wall Street. But it might not be. The selloff in some Big Tech's shares and AI-centric sectors has been ferocious, suggesting there's more at play than a negative reaction to a few earnings reports.

The AI boom's role in the bull run on Wall Street and other stock markets around the world is well documented. It has also propped up the global economy, offsetting one of the biggest energy crises in history, rising global inflation and deepening geopolitical uncertainty. Any deflating of the AI bubble could have significant economic implications. WEALTH EFFECTS

Adam Slater at Oxford Economics estimates that ‌AI-related effects in 2025-2026 boosted GDP growth across a sample of six advanced economies by an average of 0.2 percentage point. Without these effects, underlying GDP growth was only around 0.5%-1.0% a year. US growth over the same period was a healthy 2.4%, but around ‌a third of that was related to AI, Slater estimates.

Just as important as the AI outlays themselves have been the positive "wealth effects" generated by high stock prices. The AI-fueled surge on Wall Street has lifted US household net wealth, as a share of disposable income, to its highest level on record. Stocks now account for almost 47% of US households' financial assets and 34% of total assets, both record shares. This has helped maintain consumer spending, the engine of US growth, at a time when elevated inflation and high energy prices might have been expected to curb it. But wealth effects work in the opposite direction too. A downward repricing of AI-related equities could generate ⁠a "meaningful" negative wealth ​effect, note PIMCO's Tiffany Wilding and Andrew Balls.

This is particularly true at ⁠the top of the income spectrum, where the bulk of equity ownership and consumer spending is concentrated. Economists at Goldman Sachs estimate that the AI boost to US consumer spending growth from positive wealth effects was worth 0.4 percentage point, or 0.25% of GDP, over the past year. This impact was already expected to fade, but it could evaporate ⁠completely in a prolonged market downturn.

PEAK AI? Peak AI – if that is what we are seeing – would be coming at the worst time, as global growth risks for next year were already skewed to the downside.

Domestic demand in China, the world’s second-largest economy, remains chronically weak as the five-year-long property slump continues. ​The record 12th week of declining stock prices certainly won’t help consumer sentiment. Beijing could struggle to post annual growth next year of 4.5%-5.0%. Is it reasonable to expect a third year of record exports and a $1 trillion-plus trade surplus? In any ⁠case, where is the demand coming from that would deliver that surplus? Probably not Europe. The economic outlook looks shaky in many of the region’s largest economies. Political unrest and budget gridlock in France threaten to crimp already sluggish euro zone growth, Germany is expected to grow at around 1%, and Britain's 2027 outlook has just been slashed.

Consumers and businesses ⁠globally ​are being squeezed by high energy prices and borrowing costs. Brent crude oil on Friday closed at its highest level in six months, European gas prices are the highest in four years, US mortgage rates are well above 7%, and corporate borrowing spreads are widening notably, especially for firms with lower credit ratings. "The weakness of underlying growth across the advanced economies means that in the event of a serious slowdown in the AI boom – a genuine danger as we have recently argued — the risk of advanced economies going into recession would be substantial," ⁠Slater at Oxford Economics wrote last week.

A total AI capex bust and complete market meltdown are both unlikely. The infrastructure build-out is still in its infancy, as is the AI revolution itself. But the AI market narrative and sentiment are clearly shifting. Consider this: ⁠companies like Meta and Amazon are currently being punished for doubling down on ⁠big AI spending commitments, yet if they were to cut spending projections, would their share prices rise? Unlikely. When "all news is bad news," investors are getting restless. And if this discomfort turns into a rout, global growth could be hit hard.

(The opinions expressed here are those of the author, a columnist for Reuters) Enjoying this column? Check out Reuters Open Interest (ROI), your essential new source for global financial commentary. Follow ‌ROI on LinkedIn, and X.

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