• Kevin Hassett, Director of the U.S. National Economic Council, attributes the stock market rally to an unprecedented AI-driven productivity surge.
  • The S&P 500 has extended a seven-week winning streak, gaining roughly 17%, as investors price in strong earnings growth from AI and capital spending.
  • Hassett argues the productivity boom allows the Federal Reserve to cut interest rates, though risks include labor market softness and geopolitical tensions.

Productivity Boom Fuels Rally

Kevin Hassett, Director of the U.S. National Economic Council, said Thursday that the stock market's recent rally is a direct result of an "unprecedented" surge in U.S. productivity, largely driven by artificial intelligence investment and capital spending. "The market is celebrating because productivity is so high," Hassett said in an interview. He forecast 4% economic growth for 2026, attributing Wall Street's gains to an AI-driven productivity boom feeding into corporate earnings.

The S&P 500 has climbed roughly 17% over a seven-week winning streak, with investors increasingly tying the rally to AI investment rather than just valuation expansion. According to people familiar with the matter, the White House is using productivity gains to argue that supply-side growth can offset inflation risks from tariffs and trade tensions.

Rate Cut Hopes and Labor Market Concerns

In April, Hassett argued that this productivity "supply shock" should allow the Federal Reserve to cut interest rates, as AI boosts output while lowering inflationary pressure. The administration has been pressing the central bank to ease policy, even as debate over Fed independence intensifies.

However, Hassett warned that AI could create a "quiet labor market" where productivity rises but hiring slows, as companies do more with fewer employees. This has sparked concerns that AI-driven productivity may widen inequality if gains flow primarily to capital owners rather than wages. "Workers could see stagnant job growth even as output surges," one economist said, speaking on condition of anonymity.

Historical Parallels and Risks

The current productivity boom echoes the late-1990s IT revolution, which also fueled a stock market rally before the dot-com bust. Past technology-driven productivity surges have initially boosted equities but sometimes preceded labor market disruption. Morgan Stanley targets the S&P 500 at 8,300 by mid-2027, backed by 23% earnings growth in 2026 and 12% in 2027. But risks remain: overreliance on AI investment, potential labor market softening, and geopolitical trade tensions could undermine the rally. Hassett noted that recent import data reflects a surge in U.S. investment in factory construction and equipment, reinforcing the supply-side narrative. Contacted for comment, Fed officials declined to discuss rate policy.

Correction: An earlier version of this article misstated the S&P 500's gain as 15%. It is approximately 17%.