Egan-Jones Warns of First Waves of AI Disruption in Key Sectors
Egan-Jones, a credit rating agency based in the United States, is alerting investors about the initial impacts of artificial intelligence (AI) on various sectors, notably professional services, venture capital, and housing. The firm suggests that significant economic changes are on the horizon.
In their report released on October 1, entitled “It’s Over,” Egan-Jones specifically addresses institutional investors and risk managers. Interestingly, the report was not penned by credit analysts.
Sectors Facing Initial Disruption
According to Egan-Jones, professional services are likely to be the first hit. These companies typically charge clients for their time and expertise. The report highlights a case involving KPMG, a major accounting firm, which pressed its auditor Grant Thornton UK for AI-related cost savings. Financial records from the UK showed a 14% decrease in audit fees, declining from $416,000 to $357,000, as reported by the Financial Times.
Another illustration is the notable drop in IBM’s stock, which fell by 13% on February 23, marking its largest decline since 2000. This drop was connected to discussions about how AI, particularly a tool named Claude Code by Anthropic, could speed up updates to COBOL, a programming language that has been in use for decades in banking.
However, not all analysts believe this will have lasting negative effects. Evercore ISI maintained an “Outperform” rating for IBM despite the stock drop, noting that the company already offers its own modernization tools.
Next on Egan-Jones’s list is venture capital. The firm argues that startups that can grow with less funding are leaving venture capital firms with diminished power and lower profits. They suspect that many limited partners who invest in these firms may not fully understand these changes.
Impact on Housing Market
Egan-Jones also raises concerns regarding the housing market, particularly in the context of job losses. The firm notes that many households with mortgages rely on two incomes, so the loss of one job could lead to a home sale within six to twelve months.
Home prices have already been lagging behind inflation. In June, prices increased by just 1.6%, significantly lower than the average rise of 4.3% since 1987, while the S&P Case-Shiller index showed a 1.9% increase year-over-year in July. The report mentions that real home values have been declining for 14 consecutive months.
Additionally, data from Redfin indicates that, as of August, there were 57.9% more sellers than buyers, creating an unprecedented surplus of sellers in the housing market.
According to a report from The Kobeissi Letter, approximately 11,000 jobs each month are being lost in sectors vulnerable to AI, based on averages from the months leading up to June.
Despite these challenges, Egan-Jones believes that the effects on housing will be short-term. They argue that the limited availability of land in urban areas will help preserve long-term value. The report concludes that how much AI-related savings are passed on to clients, as seen with KPMG, will determine how widespread the pressure on profit margins will be.
