"S&P 500 Index May Drop 38% in Two Years"... Stock Market Rattled by 'AI Shock' Report

Rising fears over AI-driven market crash warning
"Ghost GDP": economic growth without consumption

On the 22nd (local time), major foreign media outlets such as Bloomberg News collectively pointed to a single report as the key factor behind the sharp plunge in the New York stock market.

The report, released the previous day by Citrini Research, recorded 7.5 million views on the social network service X (formerly Twitter), creating a major stir on Wall Street.

The core argument of the report is that artificial intelligence (AI) becomes so excessively successful that it shocks the economy. It projects that on June 30, 2028, the U.S. unemployment rate will soar to 10.2%, and that the S&P 500 Index could fall by about 38% over two years after hitting its peak this October.

After the report came out, the stock market wobbled. All three major New York indices closed down more than 1%. The Dow Jones Industrial Average fell 1.66%, the S&P 500 Index dropped 1.04%, and the Nasdaq Composite Index declined 1.13%.

In particular, fears that AI will encroach on the software sector intensified the sell-off, sending IBM shares tumbling 13.15%. It was the steepest drop in 25 years. DoorDash was cited in the Citrini Research report as a prime example of a company whose earnings would deteriorate, and its share price fell 6.6% on the day.

Reuters and Yonhap News Agency

AI effect sends 2028 GDP soaring... unemployment at 10% and S&P down 38%

The title of the report is "The 2028 Global Intelligence Crisis." It presents "phantom gross domestic product (GDP)" generated by AI as its key concept. AI boosts productivity, leading to strong GDP growth in the mid- to high-single-digit range. However, that growth does not translate into higher consumption, creating a distorted economic structure.

In the early phase of AI adoption, namely this year, AI automatically handles work such as coding, analysis, legal tasks, and finance, triggering a surge in layoffs among office workers. As labor costs fall, corporate profits increase and stock prices rise. The profits thus generated are plowed straight back into AI computing.

However, because machines do not consume, the output created by AI does not lead to real-world consumption. As AI performance improves, companies respond by laying off even more employees. The spending power of the laid-off workers declines. This in turn leads to deterioration in corporate earnings. Companies then once again resort to cutting labor costs and investing in AI to defend their revenue, locking the economy into a vicious cycle.

High-income professionals displaced by AI end up moving into jobs such as delivery or ride-hailing drivers. Yet as competition in these fields intensifies, wages in those jobs also decline. The report stressed that "the businesses and jobs that AI is encroaching upon are not something separate from the 'U.S. economy' but are the 'U.S. economy' itself."

This year, the market largely treated the negative impact of AI as a problem confined to specific sectors such as software. Stocks in those sectors have been sliding. But Citrini Research views this as merely the opening act. It expects AI to automate existing consumer transactions and weaken traditional intermediary-based revenue models.

From delivery applications such as DoorDash to credit cards like Mastercard, the introduction of AI is expected to eliminate platform dependence. Fee margins will be driven close to zero. The crisis triggered by AI will thus spill over from the real economy into the financial sector. As the consumer economy collapses, stock prices will plunge, and risks will spread across the entire credit market, including private credit and mortgage loans.

However, government responses will be inadequate, further aggravating the situation, and Citrini Research predicts that these structural changes will expand beyond a simple sector risk into a "systemic risk."

Praised for "accurately capturing Wall Street's fears"... but some say "a plunge driven by a fictional story"

Still, this is a scenario based on worst-case assumptions. The report stated, "We are confident that some of these scenarios will not materialize," adding, "As investors, we still have time to assess which parts of our portfolios are based on assumptions that will not hold over the next decade."

The Wall Street Journal (WSJ) said of the report that it "accurately captured Wall Street's fears," and evaluated that "much of the market action on the 23rd broadly matched the conditions the report described."

There are also views that the report is exaggerated and overstates the dangers of AI. U.S. business outlet Fortune pointed out that the "phantom GDP" thesis assumes that human jobs replaced by AI will disappear forever, whereas historically, productivity gains have served to redistribute value. For example, the advent of frozen convenience foods sharply reduced the share of employment in agriculture, but the economy redistributed value elsewhere. It also noted that because people seek not only efficiency but also trust, aesthetic sense, and interaction, humans will continue to play an important role in areas that require planning experiences, crafting stories, and building identity.

Michael O'Rourke, chief market strategist at JonesTrading, said, "The reaction is astonishing," adding, "I have seen this market demonstrate remarkable resilience even when confronted with real bad news. Yet now a single fictional story is sending the market sharply lower."