😎 Summer Sale Exclusive - Up to 50% off AI-powered stock picks by InvestingProCLAIM SALE

AI boom could continue to drive S&P 500 higher - Goldman

Published 06/07/2023, 06:53 AM
© Reuters AI boom could continue to drive S&P 500 higher - Goldman
US500
-
INTC
-
MSFT
-
CSCO
-
NVDA
-

Goldman Sachs strategists see further upside in the S&P 500 if the market continues to price in potential productivity and profit boost from the rapid adoption of artificial intelligence (AI).

“Using our dividend discount model (DDM) and our economists’ assumption that widespread AI adoption could boost productivity growth by 1.5 pp per year over a 10-year period, we estimate that S&P 500 CAGR EPS over the next 20 years would be 5.4%, compared with +4.9% that our model currently assumes, and would support an S&P 500 fair value 9% above today,” the strategists wrote in a client note.

However, they don’t believe that the market will fully price in the AI potential in the near term, given the uncertainty surrounding the timing and ability of companies.

“First, using a range of productivity scenarios, upside to S&P 500 fair value could be as small as +5% and as large as +14%. Second, a policy response such as a higher corporate tax rate could offset some of the AI-assisted boost to earnings. Third, a higher interest rate environment could negate much of the potential increase in S&P 500 fair value. Fourth, equity prices track near-term cyclical dynamics closely, and long-term bullishness on AI contrasts with near-term investor bearishness due to recession risk.”

Discussing the dot-com bubble and its similarities to 2023, the strategists say that high investor expectations are definitely a risk for the market.

“Fast-growing firms often struggle to grow into elevated valuation multiples. During the late 1990s, while many of the largest TMT stocks continued to grow sales, their inability to meet optimistic investor expectations led to a collapse in valuations,” they added.

However, investor optimism about AI is still not at extreme levels given that equity risk premium (ERP) and long-term EPS growth expectations are “roughly in line with historical averages.”

The situation is different at the stock level as Nvidia's (NASDAQ:NVDA) current valuation is “similar to the valuation accorded in the 2000s to some of the largest Dot Com Boom beneficiaries (MSFT, INTC) but not the most extreme example (CSCO).”

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.