The world's $1.8 quadrillion balance sheet has a simmering problem: Mike Dolan

These problems are well documented but speak to the question of the moment. Will the blistering AI-driven stock market surge and capex spree of recent years be justified by the real returns and productivity gains over the long term? That question is causing more angst than usual this week as the major AI "hyperscalers" report earnings. If there's even a reasonable doubt that these equity valuations are justified, their reversal could ripple far and wide. On one level, the equity issue is very U.S.-centric, with the United States accounting for nearly half of the equity held across all countries in the McKinsey sample. And U.S. equity values climbed to 2.4 times net assets last year while the figure in most other countries hovered around 1.0. But a U.S. equity pullback would affect households around the globe too. More than one-third of U.S. equity liabilities are owed to foreign entities, as is clear in the gigantic deficit in the U.S. net international investment position. So what's the report's conclusion? It restates its three main scenarios. Either we get the promised productivity miracle that AI cheerleaders tell us is coming, or persistently high inflation eventually erodes real asset values and debts and reconnects the balance sheet with nominal GDP. The third option is a painful correction in which savers and the underlying economy suffer a protracted hangover. Stake your bets now. All well and good then, unless you think that equity markets are seriously out of whack and riding for a fall. And this is where the report's authors focus their anxieties, fretting about stocks' "mounting detachment" from the real global economy, the risks of a sharp correction and rising inequality in asset holdings. Last year, for example, U.S. equity values soared to 2.4 times corporate net assets, with profits' share of U.S. GDP now double their level in 2000. Paper gains were the lion's share of the $40 trillion rise in household wealth last year. Only 20% was based on net new investment - in real assets including machinery and equipment, homes and buildings, infrastructure, and intellectual property, less depreciation - compared to 30% on average from 2000 to 2024. Valuations of existing assets grew 4 percentage points faster than already-high inflation. "When the balance sheet outruns the underlying economy, weaknesses can be exposed," McKinsey said. "When real estate and equity values rise faster than GDP, capital may disproportionately go to asset repurchases, sometimes with a lot of leverage. This may push up valuations but leave the economy deprived of the type of investment that generates long-run growth." "For households, wealth rises but merely on paper, with heightened risks of eventual corrections. Growing asset values also tend to exacerbate wealth inequality, as existing owners of wealth see large gains while entering asset markets becomes harder for others - for example, young households trying to buy a home." The vast riches comprising the world's $1.8 quadrillion financial balance sheet may speak to the rude health of the global economy. But the rapid expansion of household net worth to some $570 trillion last year is increasingly being driven by paper equity values, drifting away from tangible asset values and underlying economic performance. That makes this bill of health look a lot more precarious. The annual number crunch by business consultants McKinsey & Company tries to capture the global financial picture using a balance sheet lens, estimating the scale of interlocking assets, liabilities and wealth around the world. National variations can be stark, but the overall picture is clearly one of household net wealth expanding faster than global GDP. Equities were the main driver of this in all major economies last year. The artificial intelligence boom swept world equities 20% higher last year, even in the face of seismic U.S. trade disruptions and even as real GDP growth hovered near its long-term average. The McKinsey report said household wealth expanded 7.3% globally last year, well above the 5.9% annual average since 2000. Some 57% of that gain was due to equities, with only 15% driven by real estate - a marked departure from the average composition of wealth drivers over the past 25 years during which real estate produced more than half of the increase in wealth. To put that in context, real estate currently accounts for about half of global household net wealth. Equities and investment funds represent about a quarter, with 20% in bonds and pensions and 20% in cash deposits. Loans of roughly 15% subtract from the total. The equity percentage is a bit higher - closer to a third - in the United States.

The world's $1.8 quadrillion balance sheet has a simmering problem: Mike Dolan

AI earnings season raises the stakes

McKinsey warns of detachment and inequality

Wealth is rising faster than the real economy

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