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Wall Street Anticipates Boost from AI Stocks as Nvidia Earnings Approach

Wall Street is poised to continue its upward momentum after Monday's gains, which marked the first positive session in five for the S&P 500 and Nasdaq Composite. Investor expectations are building around Nvidia, who is set to release their earnings report on Wednesday. Despite a lackluster August, many believe Nvidia has the potential to excel. In light of this, Goldman Sachs has identified stocks that could trade well after the AI boom.

Goldman Sachs strategists Ryan Hammond and David Kostin have compiled a basket of companies that have the potential for significant long-term earnings per share (EPS) growth due to the adoption of artificial intelligence (AI) and its impact on labor productivity. According to their analysis, following widespread AI adoption, the EPS for the median stock in this basket could be 72% higher than the baseline, compared to 19% for the median stock in the Russell 1000 index.

Using a combination of company-level estimates of the wage bill exposed to AI automation and the labor cost to revenue ratio, the Goldman team estimates the potential boost in EPS from increased revenues or margins. They have found that since the emergence of AI as an investment theme in early 2023, their long-term basket of stocks has only outperformed the equal-weight S&P 500 by 6 percentage points, significantly less than short-term beneficiaries such as Nvidia, Microsoft, and Meta.

Goldman Sachs predicts that the AI-driven earnings boost will likely occur over the next few years, but it should be reflected in stock valuations sooner. However, the eventual impact on share prices will depend on companies' ability to effectively utilize AI to enhance earnings. While unable to predict exact timing, Goldman expects AI adoption to have a “meaningful macro impact” between 2025 and 2030. They also acknowledge that regulatory constraints and data privacy concerns may slow down widespread adoption. Nevertheless, approximately 75% of CEOs anticipate AI adoption to affect their companies or reduce labor needs within the next five years, even if it is not evident at present.

– Goldman Sachs Investment Research