Goldman projects AI's impact on S&P fair value and earnings over 20 years
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AI alone can add significantly to broad market gains across two decades if estimates of potential productivity and profit boosts by the Goldman Sachs equity strategy team hold.
"Equity investors are vigorously debating the influence generative artificial intelligence may have on the future revenue growth and profitability of companies, and the valuation of stocks," strategists Ryan Hammond, David Kostin, Ben Snider and team wrote in a note. "The uncertain timing for widespread adoption of AI technology means portfolio managers must also grapple with the appropriate discount rate to apply to the potential uplift in earnings." 
The Goldman economics team estimates widespread AI adoption will boost productivity by 1.5 percentage points over the next 10 years.
Taking that into account and using their dividend discount model, Goldman estimates that the S&P 500 (SP500) (NYSEARCA:SPY) compound annual growth rate for EPS will be about 5.4% over 20 years, up from the baseline assumption of 4.9%.
That would lead to a rise in the S&P (IVV) (VOO) fair value that's 9% above today (in other words, regardless of how it performs that broader market will be 9% better off than it would have been absent the AI effect).
"However, the timing and ability of S&P 500 companies to generate incremental profits from AI is uncertain and therefore is unlikely to be fully priced by investors in the near term," Hammond said.
Upside to S&P fair value could be as small as +5% or as big as +14%, based on different productivity scenarios.
In addition, "a policy response such as a higher corporate tax rate could offset some of the AI-assisted boost to earnings," higher rates could hit the potential increase and "equity prices track near-term cyclical dynamics closely, and long-term bullishness on AI contrasts with near-term investor bearishness due to recession risk."
Not a dot-com redux (yet)
"History is an inconsistent guide, with examples of innovation being priced concurrently (Dot Com Boom) and years after (Electricity) the boom in productivity," Hammond said. "At the S&P 500 index level, neither the current level of the equity risk premium nor long-term EPS growth expectations indicate an equity market that is overly optimistic on potential AI adoption benefits."
"At the stock level, the absolute valuation of large potential beneficiaries such as Nvidia (NVDA) (P/E of 49x) is comparable to some beneficiaries from the Dot Com Boom (Microsoft (MSFT), 60x and Intel (INTC), 40x) but not yet the most extreme example (Cisco (CSCO), 125x)."
"Todayâs largest leading AI beneficiaries have added 1x to the P/E of the S&P 500 index," he noted. "Excluding NVDA, Alphabet (GOOGL), and MSFT, the current S&P 500 P/E would equal 17x, roughly in line with our baseline forecast, rather than 18x."
"However, historical precedent from the Dot Com Boom shows the perils of high expectations. Even though most (tech, media, telecom) companies were still able to generate strong sales growth between 2000 and 2002, the failure to meet lofty investor forecasts led to a sharp 50%+ contraction in P/E multiple and a plunge in share prices."

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