US Stocks At The Verge Of AI-Triggered Quantum Leap: Goldman Sach's View

From the deployment of AI in day-to-day operations to potential applications in improving productivity, Goldman Sachs provided insight into the transformative potential of generative AI on U.S. equities.

What Happened: Goldman's note, issued to investors Wednesday, discusses the disruptive potential of the emerging tech and whether the hype, or perhaps the market overestimation, is outpacing reality.

Goldman said a primary point of contention was the potential and significant impact of generative AI on productivity, which strategists believe could offer considerable upside to equities over the medium to long term. Goldman's strategists also cautioned that past productivity surges have occasionally resulted in equity bubbles that subsequently burst — more on that in a bit.

Generative AI, popularized by the release of OpenAI's ChatGPT in November 2022, caused a surge of investor interest. Look at 2023's price action on stocks such as C3.ai Inc AI, Meta Platforms Inc META, and others in the AI wheelhouse, and you will understand. (For example, C3.ai stock is at $38.98 today at publication; its 52-week high is $48.87, low is $10.16.)

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As analysts Ryan Hammond and David Kostin noted, despite recent gains, there is still room for AI-driven upside in equities exposed to the tech. The potential would stem from projected productivity boosts due to widespread generative AI adoption, leading to potential gains for SPDR S&P 500 ETF Trust SPY earnings and stock prices over the long term.

Hold Your Horses: Though, despite an optimistic outlook, a few uncertainties remain, as Goldman highlighted four points of friction.

1. The impact of AI adoption on productivity could vary widely, depending on the pace of adoption and the power of AI.
2. Policy responses may limit companies’ ability to retain additional profits generated from AI, potentially leading to increased corporate tax rates.
3. A "higher for longer" interest rate environment could negate much of the potential increase in S&P 500's fair value.
4. Goldman said the near-term cyclical dynamics of the S&P 500 could overshadow long-term benefits from AI adoption.

Bubbles, Sometimes They Burst: Looking at bubbles from a historical context, the strategists addressed potential pitfalls of investor euphoria. Goldman's strategists saw parallels between the current valuation of major AI beneficiaries, such as Nvidia Corp NVDA, and those seen during the dot-com boom, cautioning against excessively high expectations.

While many tech, media and telecom (TMT) companies saw robust sales growth between 2000 and 2002, failure to meet inflated investor expectations led to a steep contraction in P/E multiples and a drastic decline in share prices.

History As A Guide: Goldman’s analysts examined the impact of innovation-driven productivity booms on major markets, focusing on two key episodes: the widespread adoption of electricity post-World War I and the internet in the late 1990s and early 2000s.

Both periods saw substantial gains in equities and equity valuations and ended in market bubbles that ultimately burst.

So, we prompt the question: Could the impending AI productivity boom trigger a similar cycle?

While there are similarities, Goldman said there are limitations in drawing a perfect parallel due to factors unique to each period, meaning we won't know the impact that generative AI will have on productivity, and eventually equities until we get there.

Goldman painted a cautionary tale, highlighting the importance of balancing optimism with realism when forecasting the potential impact of generative AI on equities.

The potential productivity boom led by generative AI has great promise, but Goldman's strategists emphasized investors should be wary of the risks associated with such a transformative shift.

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