AI can further boost the S&P 500, says Goldman Sachs. Here's how much.

By Jamie Chisholm

Critical information for the U.S. trading day

Looks like Wednesday will see Wall Street open a touch softer. As next week's inflation data and Fed decision loom, it seems the rally has stalled. But at least it's stalled above 4,200 for the S&P 500 .

What can reinforce the sense that the level which proved such a stubborn ceiling can now provide sturdy support?

Well, in a new note, a group of Goldman Sachs equity strategists, led by Ryan Hammond and David Kostin, set out to quantify the impact AI will have on business and by extension the stock market.

An executive summary of their findings might read: AI should give the S&P 500 a boost, but there's a lot of uncertainty, and a fair few caveats, too.

Let's start with how it may help company earnings. The Goldman team says the bank's own economists reckon AI could deliver a boost to aggregate revenues.

This is particularly true for those companies directly involved with the development of AI. Nvidia (NVDA) is the well-known example of a winner in providing computing power, while those exploiting a total addressable market of $150 billion for generative AI enterprise software-- assuming a 30% adoption rate -- should also make hay.

But more than that, AI may raise U.S. overall labor productivity growth by 1.5 percentage points (pp) over a 10-year period as it frees up workers to other productive activities and those workers displaced by AI automation are re-employed in the new AI-infused economy.

"Increased economy-wide output could translate into increased revenues and earnings for S&P 500 companies, even beyond those firms directly involved in the development of AI," says Goldman.

All this increased productivity and trend real GDP growth from widespread AI adoption will lift the 20-year compound annual growth rate for S&P 500 earnings per share from 4.9% to 5.4%, Goldman reckons.

And the upshot: "[W]idespread AI adoption in business practices during the next 10 years followed by a decade of faster EPS growth would support an S&P 500 fair value 9% above current levels."

That's great, however there are other factors to consider; notably the difficulty in extrapolating nascent adoption of a transformational technology and how much S&P 500 companies will actually be able to capture these profits.

"Our economists' estimates of AI adoption on productivity growth vary from 0.3 pp to 2.9 pp annually, depending on the speed of adoption, the power of AI, and the breadth of labor displacement. Based on a range of EPS growth estimates, the increase in S&P 500 fair value could range from as a low as +5% to as high as +14%," says Goldman.

The benefit of AI to the S&P 500 may also be crimped by policy considerations. With profits as a share of GDP already running at what Goldman calls an "elevated level relative to history," and wages as a share of GDP "near an historical low" it may be tempting for politicians to ensure business was not seen reaping too much reward from AI-induced worker dislocation.

For example, the effective rate of corporation tax would have to rise from the current roughly 20% to 28% in 20 years "to fully offset the 11% increase in the stream of future S&P 500 earnings that may otherwise occur as a consequence of corporations embracing AI," says Goldman.

Goldman also notes that even if the optimistic scenario for earnings does come to pass, it would unlikely protect the market from concerns about an economic downturn. Productivity growth usually explains only a small portion of S&P 500 returns.

Yet, for those worried that the current AI excitement has left the market in a dotcom-like bubble, Goldman provides the charts below. Some valuations are high but not at extremes.

Markets

Stock index futures were a touch softer as benchmark Treasury yields were little changed. The dollar was a bit weaker and gold was barely changed. Oil was firmer.

Try your hand at the Barron's crossword puzzle and sudoku games, now running daily along with a weekly digital jigsaw based on the week's cover story. To see all puzzles, click here.

The buzz

China's exports fell by 7.5% in May compared to the year before. That's much worse than the decline of 1% expected and, along with news of imports dropping 4.5%, painted a concerning picture of global demand.

Economic data on the slate for Wednesday include the U.S. trade deficit for April, due at 8:30 a.m., and the April consumer credit report at 3 pm.. Both times Eastern.

The Turkish lira fell more than 6% to touch another record low, changing hands for around 23.1 to the dollar, on signs policymakers were reducing support for the currency.

Smoke from 400 Canadian wildfires is casting a pall of smog over New York and other parts of Eastern U.S..

Shares of Yext (YEXT) rallied more than 17% in premarket after the digital platform beat Wall Street expectations for its fiscal first quarter and raised guidance for the year

Stitch Fix (SFIX) shares rose more than 7%r after the online personal styling service reported better-than-expected third-quarter results and announced plans to scale back operations.

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The chart

Short sellers appear to be increasing their bets against the semiconductor industry despite the U.S. government looking to bolster the domestic industry and reduce America's reliance on foreign nations for these materials, say Brian Scheid and Annie Sabater at S&P Global Market Intelligence.

"As of mid-May, short interest in semiconductor materials and equipment stocks has risen 77 basis points year over year to 4.52%...Short interest in semiconductor stocks was at 3.78% in mid-May, up 38 basis points in a year," they note.

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

Ticker  Security name 
TSLA    Tesla 
GME     GameStop 
NVDA    Nvidia 
AAPL    Apple 
BUD     Anheuser-Busch InBev ADR 
AMC     AMC Entertainment 
PLTR    Palantir Technologies 
NIO     NIO 
AI      C3.ai 
BABA    Alibaba ADR 

Random reads

New smiley Gecko.

A lot of slobber.

An exciting piece of wood

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-Jamie Chisholm

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06-07-23 0627ET

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