Could AI Lift All Boats? Top Wall Street Bank Predicts Potential 14% Rise in S&P 500 Fair Value, Flags Risks Over NVIDIA's Dot-Com-Like Valuations

Widespread adoption of artificial intelligence (AI) might enhance productivity growth and lead to higher stock market valuations, according to Goldman Sachs. 

In note shared Tuesday by a group of Goldman Sachs' equity analysts led by Ryan Hammond, the Wall Street investment bank forecasted AI could boost productivity growth by 1.5 percentage points per year, over a 10-year period. The fair value of the S&P 500 might rise between 5% to 14% as a result.

The bank warns, however, that certain companies, such as NVIDIA Corporation NVDA, are already screening dot-com-like expensiveness, which might lead to market setbacks.

AI Alone Could Boost S&P 500 Index's Fair Value Up To 14%: If the productivity-boost scenario materializes, the S&P 500 EPS growth over the next 20 years would rise to 5.4%, compared with the 4.9% that the investment bank's model currently assumes. This would sustain an S&P 500 fair value of 9% above today.

In a more bullish scenario of a 5.8% annualized growth in EPS, the S&P 500 fair value would be 14% higher than today. In the bearish scenario, which assumes a smaller boost in EPS growth of 5.2%, the S&P 500 fair value would be 5% higher.

Factors Lifting All Boats: One reason Goldman Sachs expects AI to boost productivity is by freeing up workers' capacity in jobs partially exposed to AI automation. This allows them to allocate their time towards more productive activities, resulting in increased output.

Additionally, as workers displaced by AI automation transition into new jobs, they are anticipated to contribute to total output growth in emerging industries.

Lessons From The Dot-Com Bubble: Goldman Sachs also highlights the risks associated with high expectations surrounding AI. Drawing from the dot-com boom experience, where technology, telecom, and media companies faced soaring investor forecasts, the failure to meet these lofty expectations had significant consequences, leading to a contraction of more than 50% in price-to-earnings (P/E) multiples and a subsequent sharp decline in share prices.

"The current valuation of the largest AI beneficiaries (NVDA) is similar to the valuation accorded in the 2000s to some of the largest dot-com boom beneficiaries — namely Microsoft Corp. MSFT and Intel Corp. INTC — but not the most extreme example of Cisco Systems Inc. CSCO," Goldman Sachs wrote. 

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