The RBA's extraordinary warning about AI share prices
How much future profit growth is already reflected in soaring US technology share prices?
Speaking on 26 October, Reserve Bank Assistant Governor Brad Jones warned that, until recently, market valuations implied approximately 45% annual earnings growth for the US information technology sector indefinitely, beyond the next three years.
The arithmetic is extraordinary. A company earning $10 billion today would earn $411 billion in ten years if profits compounded at 45% annually.
Jones also warned about increasing debt financing, complex funding arrangements and the concentration of sharemarket value in a handful of technology companies.
This matters for Australian superannuation funds, which invest heavily in international equities, including US technology stocks.
If AI profits disappoint, share prices could fall sharply, reducing members' retirement savings.
The RBA is not questioning AI's technological potential. Its concern is whether investors have already priced in unrealistic financial returns.
A technological revolution does not guarantee an investment revolution.
Today $10bn Annual earnings | After ten years at 45% $411bn Annual earnings |
| Period | 10% growth | 45% growth |
| Today | $10.0bn | $10.0bn |
| Year 3 | $13.3bn | $30.5bn |
| Year 5 | $16.1bn | $64.1bn |
| Year 10 | $25.9bn | $410.8bn |
| Exposure to affected technology stocks | 15% |
| Hypothetical correction in those stocks | −30% |
| Reduction in super balance | −$4,500 |