IMAGINE a world in which you are manipulated by intelligent advertisements from dusk until dawn. Your phone and TV screens flash constantly with commercials that know your desires before you imagine them. Driverless cars bombard you with personalised ads once their doors lock and if you try to escape by putting on a virtual-reality headset, all you see are synthetic billboards. Your digital assistant chirps away non-stop, systematically distorting the information it gives you in order to direct you towards products that advertisers have paid it to promote.

Jaron Lanier, a Silicon Valley thinker who was an adviser on “Minority Report”, a bleak sci-fi film, worries that this could be the future. He calls it a world of ubiquitous “digital spying”. A few platform firms, he fears, will control what consumers see and hear and other companies will have to bid away their profits (by buying ads) to gain access to them. Advertising will be a tax that strangles the rest of the economy, like medieval levies on land.

It may sound outlandish, but this dystopia is increasingly what stockmarket investors are banking on. The total market value of a basket of a dozen American firms that depend on ad revenue, or are devising their strategies around it, has risen by 126% to $2.1trn over the past five years. The part of America’s economy that is ad-centric has become systemically important, with a market value that is larger than the banking industry.

The biggest firms are Facebook and Alphabet (Google’s parent), which rely on advertising for, respectively, 97% and 88% of their sales. But the chunky valuations of America’s giant TV broadcasters imply that their ad revenues will fall very slowly, or not at all. Startups that rely on advertising, such Snap, are floating their shares at prices that suggest huge growth. Large deals, too, are being justified by potential ad revenues. Microsoft’s $26bn acquisition of LinkedIn in 2016 was partly premised on “monetising” its user base through adverts. The main reason AT&T says it wants to buy Time Warner for $109bn is to create a digital ad platform linking AT&T’s data to Time Warner’s TV content.

The immense sums being bet on advertising raise a question: how much of it can America take? A back-of-the-envelope calculation by Schumpeter suggests that stock prices currently imply that American advertising revenues will rise from 1% of GDP today, to as much as 1.8% of GDP by 2027—a massive jump. Since 1980 the average has been 1.3%, according to Jonathan Barnard of Zenith, a media agency, and in the past few years the advertising market relative to GDP has been shrinking.

There are reasons why it might go on a tear, points out Rob Norman of GroupM, another media agency. In the old days adverts in Time magazine or on billboards in Times Square were big-ticket items that only giant firms could afford. But tech platforms have done a brilliant job of persuading smaller companies to spend money targeting customers. Facebook has 6m advertisers, equivalent to a fifth of all American small firms.

Adverts could become even more effective at identifying customers and enticing them to spend money, using troves of data that have been gathered to anticipate their needs. As commerce shifts online, firms will cut back on conventional marketing (for example, the fees that consumer goods and food firms pay to Walmart to ensure products are displayed prominently on its shelves), freeing up budgets to spend more on digital ads.

Yet there are two logical limits to the size of the advertising market. First, the irritation factor, or how much consumers can absorb without being put off. In the analogue era the rule of thumb was that ads could comprise no more than 33-50% of TV or radio programming, or of a magazine’s pages, says Rishad Tobaccowala, of Publicis, an advertising firm. The digital world is already showing signs of saturation.

More people are using ad-blocking software. Tech brands that eschew bombarding customers with ads, such as Apple and Netflix, are wildly popular. The drive to lift user “engagement” on social-media platforms by showing sensational content, in turn boosting the number of ads that can be sold, has prompted a backlash. On January 11th Facebook said it would show users fewer posts from “businesses, brands and media”. Time spent online by the typical American is growing at about 10% a year, less than the 15-20% ad-sales growth that many digital firms expect.

The second limit on the size of the advertising market is how much cash all other firms, in aggregate, have at their disposal to spend on ads. In theory they could spend more and more until their overall returns on capital drop below the cost of capital, compromising their financial viability. Remarkably, expectations for ad revenues are now so bullish that they imply that this boundary will indeed be tested.

Commercial breaking-point

Imagine if advertising spending really did rise to 1.8% of GDP in America by 2027. Most firms’ costs would have to rise, cutting total corporate profits (excluding those of ad platforms) from about 6.5% to 5.7% of GDP, the kind of drop normally associated with a recession. Alternatively, imagine if the firms in the S&P 500 index (excluding ad platforms) bore all the additional cost of the advertising boom. Their combined return on capital would drop from the present 10% to 8%, at or just below their cost of capital. America Inc would go from being the world’s greatest profit machine to flirting with Japanese-style financial-zombie status.

That does not seem realistic. More probably, hopes for a new age of advertising nirvana are too optimistic. Perhaps the ad sales of conventional media firms (which are about half of the total, with TV dominating) will drop fast rather than merely stagnate. Or perhaps digital firms will struggle to increase ad sales at compound annual rates of 15-20% or a decade, as their valuations imply. Expectations for both groups are surely too high. In the advertising world, and on Wall Street, something does not ad up.