AI innovation drives economic transformation

Time to read: 2 minutes

JANUARY 6, 2026—Niladri “Neel” Mukherjee’s forecast two years ago that enthusiasm for artificial intelligence (AI) would help spur the “next great bull market” looks prescient—perhaps too much so. A powerful advance in shares of microchip, data, and other AI-linked companies shows “markets are pricing in these transformative changes more quickly than we had anticipated,” Mukherjee says.

Looking into 2026, TIAA Wealth Management’s chief investment officer sees both opportunity and risk in what’s fast becoming an AI-driven economy. While Mukherjee expects positive stock market returns in 2026, he also sees greater risk of market volatility. The bar is high for richly valued large-cap tech stocks, which means they may be prone to sell-offs should earnings not live up to investors’ lofty expectations.

Whatever markets do, Mukherjee expects AI to remain the economy’s dominant force. AI-related fixed investments reached $1.4 trillion by the second quarter of 2025, accounting for 75% of all nonresidential and residential fixed investments during that period. In 2026 alone, “hyperscalers” such as Microsoft, Amazon, Google, Meta, and Oracle—companies involved in large-scale cloud computing—are expected to have more than $500 billion in capital expenditures, representing more than one-third of what the total S&P 500 is expecting to spend. That’s up from less than 15% just three years ago.

Mukherjee stresses that transformational innovation rarely progresses smoothly. Two concerns stand out. First, tech companies are borrowing more—a lot more. AI-related debt now accounts for 30% of total U.S. issuance, up from roughly 15% in 2024. More leverage means more risk if earnings don’t grow as expected. Second, investors have become more discerning. They want to see gains in productivity and profits from the companies touting AI prowess. “The idea now is, ‘Show me the ROI,’” says Mukherjee, referring to the need to see return on investment instead of simply high potential for it.

Risks of a “K-shaped” economy

Mukherjee also points to the risks of divergent, “K-shaped” U.S. economic growth. The upward-trending arm represents wealthy consumers and big tech. The downward-pointing arm indicates lower-income consumers and other industries.

AI’s success, Mukherjee says, has “papered over some other concerns percolating through the economy”—manufacturing in recession, a stalled housing market, lower-income consumers taking on more credit card debt, more subprime lending, and rising loan delinquencies. When a narrow band of consumers and industries drive the economy, investors face the risk that key drivers may slow or deteriorate.

International equities and fixed income

In a turnabout from recent years, international stocks outperformed U.S. stocks for most of 2025, and Mukherjee sees continued opportunities in non-U.S. stocks in 2026. Tariffs and rising geopolitical fracturing are forcing other nations to invest more in their own defense, infrastructure, and technology.

Mukherjee expects any significant changes around trade policy, a slowing labor market, and uncertainty around the Federal Reserve’s path for setting interest rates to drive bond market volatility as well. He anticipates the 10-year Treasury yield to trade in a 3.5% to 4.25% range. But he points out that renewed concerns about U.S. fiscal sustainability—the United States is expected to borrow more than $2 trillion in 2026—could nudge it higher.

In the corporate bond market, the rate spread between high-credit-rating and low-credit-rating bonds remains near decade lows. Given the relatively low yields offered by riskier bonds, “we’re keeping our bias to high quality,” Mukherjee says.