After the S&P 500 SPX and Nasdaq Composite COMP snapped their five-session losing streak with gains on Monday, the momentum appears to be continuing. The focus is now on Nvidia, which has experienced a lackluster August, with high hopes for a stellar earnings report on Wednesday.
Investors have been closely following AI giants like Nvidia for months. In today’s featured analysis, Goldman Sachs delves into post-AI trade stock options.
The bank’s team, led by strategists Ryan Hammond and David Kostin, has curated a selection of companies poised to benefit from the long-term earnings per share (EPS) boost resulting from the integration of AI into labor productivity.
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Their research reveals that once AI becomes widely adopted, the median stock in their curated selection could experience a remarkable 72% increase in EPS compared to the baseline, significantly surpassing the 19% growth projected for the median Russell 1000 stock.
“We estimate the potential productivity-related EPS boost from increased revenues or increased margins, using a combination of company-level estimates of the share of the wage bill exposed to AI automation and the labor cost to revenue ratio,” explained the Goldman Sachs team.
Since the emergence of AI as an investor theme in early 2023, the long-term stock basket they assembled has outperformed the equal-weight S&P 500 by a modest 6 percentage points. This performance lags behind the short-term beneficiaries like Nvidia (NVDA), +8.47%, Microsoft (MSFT), +1.71%, or Meta (META), +2.35%.
Goldman Sachs suggests that the anticipated AI-driven increase in earnings is likely to materialize over the upcoming years, yet the effects on stock valuations should manifest sooner. The ultimate impact on share prices, however, hinges on companies’ adeptness at utilizing AI to bolster their earnings potential, according to the bank’s analysis.
Although pinpointing the exact timing is challenging, Goldman envisions that the substantial macro influence of AI adoption will commence sometime between 2025 and 2030. This timeline acknowledges the potential regulatory constraints and concerns surrounding data privacy that might impede widespread adoption.
Notably, nearly 75% of CEOs foresee AI uptake influencing companies or reducing labor requirements within the next five years, even if they are not experiencing those effects immediately.
According to the strategists, companies that possess larger workforces with substantial exposure to AI and those that exhibit greater innovation tendencies are likely to embrace generative AI at an earlier stage compared to their counterparts. The strategists suggest that as the adoption timeline for these companies becomes more defined, one should anticipate an initial uptick in valuation multiples, even if the actual adoption of AI and the subsequent EPS enhancement occur later.
Goldman Sachs’ estimations regarding the potential earnings augmentation for these beneficiaries of long-term AI adoption encompass various factors. These factors include the proportion of each company’s wage bill that could be influenced by AI automation, the extent of a company’s wage bill that might be exposed to AI automation, and the labor cost relative to revenue.
“For the typical Russell 1000 stock, approximately 33% of the wage bill could be exposed to AI automation, and labor costs currently constitute around 14% of total sales. If sales increase, the potential boost in earnings would be about 11%, while a reduction in labor costs could elevate earnings by 26%, all other factors remaining constant,” explain the strategists.
➤ Stocks Poised for AI Adoption
Below is a preview of the basket containing companies poised to benefit from long-term AI adoption:
