Two Big Upside Risks To Watch

Stocks made new record highs, with the S&P 500 reaching a closing high of 5,137.08 and an intraday high of 5,140.33 on Friday. For the week, the S&P gained 1%. The index is now up 7.7% year to date and up 43.6% from its October 12, 2022 closing low of 3,577.03.

In the markets and the economy, things rarely unfold exactly as expected. Often they’re better than expected. Sometimes they’re far worse.

In the same way that it’s helpful for investors to be mentally prepared for bad news and market volatility, it’s smart to balance that by also understanding what could go right.

Two hyped developments of late are the boom in artificial intelligence (AI) technologies and the emergence of GLP-1 drugs. Both are innovations that are expected to have far-reaching implications.

This past week came with bullish Wall Street research on each.

Here’s Morgan Stanley on AI (emphasis added):

… there is a notable amount of overlap among the industries discussing operational efficiency most prevalently and those that have the potential to realize more significant AI-driven efficiency gains based on the new framework we introduce in this report. … We see AI-driven productivity adding an additional 30 bps to 2025 net margin for the S&P 500 (13.0% net margin in the base case) though we believe risk is skewed to the upside/our bull case in this respect — 50 bps of added impact.

One of the biggest stories in the stock market in recent years has been the persistence of historically high profit margins. AI could prove to be a key tailwind that enables companies to turn a little bit of revenue growth into a lot of earnings growth.

Here’s Goldman Sachs on GLP-1 drugs (emphasis added):

… GLP-1 drugs could significantly reduce obesity, and obesity-related health complications subtract 3% from per capita output according to academic estimates. Under reasonable estimates for uptake and effectiveness, we estimate that GLP-1 drugs could raise GDP levels by 0.4%, with the effect rising to 1% if the number of users reaches the 60mn benchmark our equity analysts see as possible.

This is also encouraging, especially as some of the major economic tailwinds of late fade and GDP growth cools.

Zooming Out

Sure, it’s possible that much of the upside with these stories is already priced into the markets. It’s also possible that the actual results are less exciting than anticipated.

But it’s also possible that we learn that analysts like those at Morgan Stanley and Goldman Sachs actually underestimated the promise of AI and GLP 1 drugs.

The bottom line is that people continue to come up with new ways to enhance productivity, and some of these innovations have gotten real traction.

All eyes are on these trends as we better understand just how big of an impact they will have on the markets and the economy.

A version of this post was originally published on Tker.co.