Before the Age of AI, economists were taught that there are only three factors of production, namely, Land, Labor, and Capital. The job of economists is to optimize the allocation of these scarce resources to maximize output (i.e., real GDP). Now, economists should recognize that there is a fourth factor of production, namely, Data. This resource is unlimited. But until AI, it wasn't very useful because it was very expensive to collect, process, and analyze.
The Data Revolution that started in the mid-1960s was all about processing as much data as quickly and as cheaply as possible. A great deal of progress has been made in doing so since the IBM mainframe computer was introduced on April 7, 1964 until now, after OpenAI introduced ChatGPT on November 30, 2023. As a result of this progress, the share of nominal capital spending in high-tech has increased from around 20% to a record 55% over this period (chart).
The Digital Revolution increases the incentive to create more Data (a.k.a. Information), especially now that AI tools can process so much more of it, increasing its value as a factor of production by boosting productivity. This is the story we've often told before, and it is the story the stock market is now discounting, especially in semiconductor stocks in general and in memory stocks in particular (chart).
All the data increases the demand for "compute." It further increases the demand for memory because all data must be stored indefinitely unless it is voluntarily deleted. This is our Buzz Lightyear Theory (BLT) of AI, which is taking the Data Revolution "to infinity and beyond." That's even more exciting and bullish than our Roaring 2020s scenario.
We recognize that our exuberance might be irrational. It might be a jinx. If China invades Taiwan tomorrow, then we will have made the top in the AI trade. Other than that event, we are struggling to figure out what else could go wrong with our BLT.
(Also see our March 24, 2026 QT titled, "Thanks for the Memory.")
The AI trade helps to explain why the Russell 2000 is soaring to new highs. The Information Technology sectors of the S&P 400 and S&P 600 have considerably outperformed the Information Technology sector in the S&P 500 so far this year (chart).
We are also getting more exuberant about the US economy. So far, it is acing the latest stress test, i.e., the war in the Middle East. Q2 real GDP is tracking at 3.7% (chart).
