Stocks are pricing in an AI revolution, putting investors at risk of disappointment, Bill Gross says

• The stock market has surged this year as investors bet big on an artificial-intelligence revolution.
• AI may have to boost US productivity growth to justify the high price of stocks, Bill Gross says.

Investors have piled into technology stocks like Nvidia, Microsoft, and Tesla this year, as they expect artificial intelligence to revolutionize the US economy. The stock market has priced in those high hopes, putting investors at risk if the nascent tech doesn't live up to their expectations, Bill Gross has warned.

"Could AI increase a historical productivity growth rate in the US economy from 2% to 3%?" Gross asked in a X post on Tuesday. "It may need to in order to justify current stock prices at today's real interest rate levels."

The billionaire investor and PIMCO cofounder was making the point that higher interest rates typically pull down stock prices, yet the market has rallied strongly this year despite the Federal Reserve hiking rates from virtually zero to over 5% since last spring.

The S&P 500 and Nasdaq Composite have surged 14% and 29% respectively since the start of January, and both indices touched their highest levels in more than a year in July. Their gains have confounded experts, as higher rates lessen the appeal of stocks relative to safer assets like bonds, increase companies' debt costs, and can erode demand across the economy, reducing corporate profits.

Public companies are generally valued at a multiple to their earnings, meaning their stock prices usually fall if their profits shrink, or if investors can earn a nice return from other assets and place less of a premium on stocks. Higher rates can lead to both outcomes.

Gross' point is that AI might have to accelerate US productivity growth from its historical average of 2% to 3% to warrant the heady valuations of stocks today, at a time when higher rates are weighing on them.

The investor — whose nickname is the "Bond King" — has been skeptical of the AI-fueled surge in stocks for a while.

"Exciting doubles match currently in stock market," he posted on X in late July. "AI and market momentum vs China/US slowdown and negative curve persisting. I pick the latter."

Gross also suggested recently that Apple and other high-flying stocks needed a breather following their strong gains this year. Moreover, he said that he preferred owning Activision Blizzard to Nvidia, one of the hottest AI-related stocks on the market.

On the other hand, Gross has slammed GameStop for "becoming technologically obsolete" in contrast to many AI companies, and touted OpenAI's ChatGPT tool.