AI Ascendancy

From an economic perspective, the promise of artificial intelligence has been the ability to increase productivity following a decade or more of very low productivity growth. What is productivity? Productivity is critical to economic growth because it allows the economy to produce more goods and services with the same, or even less, resources. As a result, productivity raises living standards by increasing real wages, lowering inflation, and increasing international competitiveness. Every major technological breakthrough, from the ability to create fire hundreds of thousands of years ago has increased productivity. When Henry Ford developed a way to mass-produce automobiles, rather than craft them by hand, it radically changed transportation and was a massive productivity gain for the economy.

AI has similar potential. It will take time to integrate AI into the economy, but the first signs are already appearing. The development of AI technology has been lightning-fast. It was just over three years ago that ChatGPT was introduced to the world. It was fun, it was interesting, it was a little bit scary, but it was also clunky. There were lots of hallucinations (i.e., errors). The race among the megacap tech companies to be “the” AI leader has turbocharged development, and massive strides are coming fast and furious. The AI models you see today are already light-years better than the original ChatGPT, and the result is that adoption of AI into corporate operations and everyday life is accelerating at an equivalent pace.

This week, the Wall Street Journal ran a story with the headline “Big Returns From AI Investments Are Here”. Speaking at the WSJ CFO Council Summit, several CFOs, including those from Levi Strauss, Shopify, and ServiceNow, detailed not only large savings from AI, but also cultural changes within the organization to make AI literacy a key component of employee success. ServiceNow disclosed that AI investments have already produced savings worth $355 million, with almost 2/3 of that reinvested and about $125 million falling to the profit line. To put that in perspective, ServiceNow earned $1.75 billion in 2025, so these savings are not small potatoes.

These early productivity gains are critical to AI development and deployment, but the AI development story is not over. The race to build market share and dominate this important market rages on, and that implies that AI pricing is a good bit less than what firms would desire over the long run. Market share battles are typically fought with price. So, the longer-term question will be whether these productivity gains can be replicated when the services are fully priced. Even with that caveat, the progress to date is highly encouraging for higher corporate profit margins as AI is adopted on a larger scale. This is still a technology in its infancy, but it is growing up very quickly.

 

Mr. Trump’s War

The stock market has remained steadfast in the belief that the President will find an off-ramp from the conflict. However, it is more than obvious that any off-ramp requires some cooperation with an enemy that has no desire to cooperate. That presents obvious risks. We believe that the “red line” for markets would be boots on the ground, which is the current threat from the U.S.

If the President is forced to follow through on that threat, then the belief in a short war will be quickly replaced by a very unpleasant long-war scenario. Asian countries are already beginning to address the near-term potential for energy shortages. This week, the Philippines announced emergency measures as it attempts to stretch out its current energy supplies. If energy shortages are allowed to expand much further, it could place enormous pressure on global growth as well as drive more inflation. While the U.S. is more insulated from supply shocks, it is not insulated from price shocks, as we have already seen at the gas pump. The war is now at a critical stage with global economic implications on the line.

Have a great week!

 

What We’re Reading

 

Palumbo Wealth Management (PWM) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where PWM and its representatives are properly licensed or exempt from licensure. For additional information, please visit our website at www.palumbowm.com.

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status, or investment horizon. You should consult your attorney or tax advisor.

The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

All information has been obtained from sources believed to be dependable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

All information has been obtained from sources believed to be dependable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such.

The views expressed in this commentary are subject to change based on the market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that no such statements are guarantees of any future performance, and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

Past performance is no guarantee of future returns.

, , , , , ,

General News

By: Adam