Investors are analyzing the impact of generative artificial intelligence (AI) on the stock market. Nvidia’s recent surge in sales and market value due to AI-inspired demand for its advanced chips has captured investors’ attention. The influence of generative AI on revenue growth and profitability is being assessed. While the boost in corporate earnings from generative AI is uncertain, Goldman Sachs Research suggests that AI adoption could enhance productivity growth by 1.5 percentage points per year over a 10-year period. This estimation leads to a projected 5.4% compound annual growth rate in EPS for the S&P 500 over the next 20 years, indicating a 9% increase in its fair value.
Semiconductor companies directly benefit from generative AI due to the high computing power required for large-language model algorithms. The total addressable market for generative AI enterprise software is estimated to be around $150 billion, representing 1% of current S&P 500 sales. While the timing and profitability of AI adoption remain uncertain, increased economy-wide output could lead to revenue and earnings growth for S&P 500 companies beyond those directly involved in AI development.
The full pricing of AI by investors is unlikely in the near term due to the difficulty in predicting profitability. Various scenarios suggest that the S&P 500’s fair value could range from a 5% increase to a 14% increase. Policy responses and higher tax rates may hinder the earnings growth resulting from AI adoption. Furthermore, the displacement of workers and the time required for reemployment could lead policymakers to take action to support affected individuals. Interest rates and government spending programs also play a role in determining the potential increase in fair value for the S&P 500.
Equity prices are influenced by business cycle dynamics, and although long-term optimism on AI adoption exists, near-term concerns related to recession risks prevail. The impact of productivity on the S&P 500’s returns is limited, as historical data shows that only 1% of the variation in returns can be explained by five-year productivity growth. The dot-com boom serves as a reminder of the risks associated with high investor expectations. While optimism on AI adoption is not currently at extreme levels, individual stocks, especially those benefiting most from AI, may have valuations resembling dot-com beneficiaries during the Internet boom.
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