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Embodied AI: bullish or bearish for markets?
Economy
Embodied AI—artificial intelligence systems embodied in physical form, such as robots, vehicles, and drones—remains a controversial technology in terms of labor displacement.
According to Barclays analysts, no other technology has generated such widespread skepticism. But how will markets react to it over time?
Overall, the investment bank is optimistic for a number of reasons, but notes that historically, stock markets have often been slow to recognize the potential of innovations to "create entirely new major markets," although this does eventually happen.
Recently, "markets have become focused on assessing the displacement effects associated with all things AI," the analysts continue, adding that if this were any other technological breakthrough, the market reaction would be "unequivocally positive." "There is significant and deep-seated skepticism about whether AI-induced displacement effects—companies becoming unprofitable, jobs disappearing, or losing their contribution to labor income—will undermine the economy to the point of depressing asset prices," the analysts explain.
They believe this negative outlook is misguided.
"Putting aside the winners and losers, the aggregate impact of physical AI on equities is unambiguously bullish," the analysts say, adding that the impact on bonds and currencies is likely to be less linear.
Crowding out from new technologies is typically a political, not an economic, issue, the bank argues. For investors fearing the complete destruction or destabilization of entire sectors, the analysts point to the example of South Korea, which has become richer despite declining production costs and export prices.
This is "encouraging and consistent with Ricardian economic theory," the analysts note.
They also point out that the "cornerstones" of wealth creation are increased production with the same resources, increased efficiency, and reduced opportunity costs—all of which AI and Embodied AI promise to deliver. Moreover, physical AI is already improving efficiency and return on investment in sectors such as logistics, manufacturing, waste management, and agriculture.
In this sense, the current disruption is no different from the Industrial Revolution in terms of the wide range of benefits it is expected to bring, even if some companies and individuals will benefit more than others.
"Financial markets are poised to transform accumulated wealth into funding for new companies and private projects. Historical analogies show that automation and technological progress are compatible with high asset returns," the analysts add. Despite this optimism, they highlight a number of sectors lagging in technology adoption—particularly automotive and insurance—where the technology poses potential long-term risks: for example, autonomous vehicles could reduce the need for personal cars.
Overall, however, analysts view Embodied AI as a technology that "drives the transition to more efficient, automated, and data-driven operations in both capital-intensive and service-oriented industries"—and markets will eventually have to recognize this.