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By Kristina Hooper

AI relies on rare-earth elements to grow its infrastructure – and the U.S. relies on AI to grow GDP

Capital spending on AI has been a key driver of U.S. stock market returns and continues to exceed expectations, comprising a large portion of S&P 500 SPX capital expenditures.

Jason Furman, a Harvard University economics professor, calculated that 92% of total U.S. GDP growth for the first half of 2025 could be attributed to AI spending. Without AI-related data-center construction, he reported, GDP growth would have been an anemic 0.1% on an annualized basis.

Given so much riding on the AI capex boom, it’s important to consider what could derail U.S. economic growth and the U.S. stock market

One major risk is access to rare earth elements. Limited rare-earth access could present the U.S. with challenges similar to what it faced in the 1970s from its dependence on oil.

Rare-earth elements are used extensively in artificial intelligence, including disk drives, cooling servers and especially semiconductor fabrication. Artificial intelligence has enormous computational and memory demands, which is why high-capacity, high-performance semiconductors are the linchpin of the AI build-out. Rare earths are also integral for national security – used in radar, lasers and satellite systems.

From the 1960s to the 1990s, the U.S. was the leader in rare-earth elements production. In 1995, two decisions were made that had far-ranging consequences, dramatically changing the trajectory of U.S. leadership in rare earth elements.

First, the U.S. approved China’s purchase of U.S. rare-earth magnet company Magnequench from General Motors, thereby acquiring a highly advanced technology that arguably would have taken many years to develop.

Second, China applied to join the World Trade Organization, ultimately enabling it to sell its rare-earth elements to a global market. China was able to sell at a lower cost than the U.S., contributing to the closure of the U.S. mining company that produced rare earth elements, MP Materials Corp. (MP), in 2002.

MP Materials was reopened for national defense use in 2017. U.S. production has since ramped up, with rare-earth production reaching 45,000 tons in 2024 – yet that’s still less than one-sixth of China’s production.

Yet the U.S. Department of Defense’s lofty goal of meeting defense-related demand for light- and heavy rare earths by 2027 may not be achieved, given America’s rare-earth mining and processing limitations. Even if it is, significant commercial demand, including the enormous AI build-out, will not be met.

China controls the supply

China controls around 70% of the world’s rare earth resource output and about 90% of the world’s rare earth processing capabilities. Access to rare-earth elements has been a key bargaining chip in U.S. trade negotiations with China.

As a result, the U.S. has been increasing efforts to diversify its rare-earths supply and gain reliable and adequate exposure to these elements through its allies. Australia and Canada, for instance, have significant rare-earth resources that can help support America’s rare-earth element needs.

New technologies may also lessen or eliminate the need for rare-earth elements in various uses and make rare-earth element recycling more efficient (currently, just 1% of rare-earth elements are recycled). In addition, U.S. government policies can discourage or at least disincentivize demand for rare earth element-intensive products such as electric vehicles, as the Trump administration has done by eliminating EV tax credits.

Rare earth element independence should be as high a priority for the U.S. as energy independence was 50 years ago. Until there’s a viable alternative to the China-dominated rare-earth supply chain, AI capital spending – and both the U.S. economy and stock market – are vulnerable. Accordingly, stock investors should pay attention to trade deals and policymakers’ comments, and consider supply-chain risks when evaluating AI-related investments.

Kristina Hooper is chief market strategist at Man Group, which manages alternative investments. The opinions expressed are her own.

More: Big Tech is spending on power for AI – whether Washington functions or not

Also read: AI has real problems. The smart money is investing in the companies solving them now.

-Kristina Hooper

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  11-21-25 0805ET
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