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

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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?SPX,?0.32% .

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,?1.64% ?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?ES00,?0.19% ?YM00,?0.04% ?NQ00,?0.47% ?were a touch softer as benchmark Treasury yields?TMUBMUSD10Y,?3.698% ?were little changed. The dollar?DXY,?-0.24% ?was a bit weaker and gold?GC00,?-0.24% ?was barely changed. Oil?CL.1,?0.75% ?was firmer.

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