AI boom could continue to drive S&P 500 higher

Goldman Sachs strategists see additional upside within the if the market continues to cost in potential productiveness and revenue enhance from the speedy adoption of synthetic intelligence (AI).

“Utilizing our dividend low cost mannequin (DDM) and our economists’ assumption that widespread AI adoption might enhance productiveness progress by 1.5 pp per 12 months over a 10-year interval, we estimate that S&P 500 CAGR EPS over the following 20 years could be 5.4%, in contrast with +4.9% that our mannequin at the moment assumes, and would help an S&P 500 honest worth 9% above at present,” the strategists wrote in a shopper notice.

Nonetheless, they don’t imagine that the market will absolutely worth within the AI potential within the close to time period, given the uncertainty surrounding the timing and talent of firms.

“First, utilizing a spread of productiveness situations, upside to S&P 500 honest worth may very well be as small as +5% and as massive as +14%. Second, a coverage response similar to the next company tax price might offset a few of the AI-assisted enhance to earnings. Third, the next rate of interest atmosphere might negate a lot of the potential improve in S&P 500 honest worth. Fourth, fairness costs monitor near-term cyclical dynamics carefully, and long-term bullishness on AI contrasts with near-term investor bearishness because of recession threat.”

Discussing the dot-com bubble and its similarities to 2023, the strategists say that prime investor expectations are positively a threat for the market.

“Quick-growing corporations typically wrestle to develop into elevated valuation multiples. Throughout the late Nineties, whereas lots of the largest TMT shares continued to develop gross sales, their incapability to fulfill optimistic investor expectations led to a collapse in valuations,” they added.

Nonetheless, investor optimism about AI continues to be not at excessive ranges provided that fairness threat premium (ERP) and long-term EPS progress expectations are “roughly in keeping with historic averages.”

The scenario is totally different on the inventory stage as Nvidia’s (NASDAQ:) present valuation is “much like the valuation accorded within the 2000s to a few of the largest Dot Com Increase beneficiaries (MSFT, INTC) however not probably the most excessive instance (CSCO).”