Goldman: Stock Market Overvalues AI Boom by $19 Trillion

Goldman Sachs recently addressed a pivotal question regarding the U.S. equity market: Is it accurately valuing the benefits of artificial intelligence (AI)? Their analysis suggests an underlying agreement, asserting that while valuations are high, they do not reflect a bubble. However, the investment bank warns that the market appears overly optimistic about AI’s long-term economic impact.

Market Valuation and AI Potential

Goldman Sachs analysts, Dominic Wilson and Vickie Chang, indicate that the U.S. equity market might be factoring in a significant amount of AI’s future long-term value. Their analysis employs “simple arithmetic,” revealing that the market pricing for gains from AI initiatives exceeds realistic macroeconomic benefits.

Capital Revenue Estimates

The report highlights the Present Discounted Value (PDV) of capital revenue from generative AI for the U.S. economy. The baseline estimate stands at $8 trillion, with potential future revenues projected between $5 trillion and $19 trillion. This range effectively justifies current and future investment levels in AI-related capital expenditures.

Market Enthusiasm and Valuation Increase

Since November 2022, following the launch of ChatGPT, the valuation of AI-related companies soared by over $19 trillion. This remarkable growth includes significant increases in the semiconductor sector and among the largest private AI model providers.

• Valuation increase attributed to AI boom exceeds $19 trillion.
• Major gains observed in semiconductor companies and hyperscalers.
• Value of the three largest private AI model providers rose by nearly $1 trillion.

Goldman Sachs emphasizes that the current market appreciation already rivals the upper limit of projected macroeconomic benefits, ultimately surpassing the baseline estimate of $8 trillion.

Risks of Overvaluation

Despite the optimistic outlook, Goldman Sachs warns of two significant risks linked to this overvaluation. These include:

• Fallacy of Aggregation: Investors might assume that exceptional revenue and profit growth from individual companies applies broadly. This could inflate the joint valuation of various AI players beyond sustainable limits.
• Fallacy of Extrapolation: Initial profitability gains derived from innovation may diminish over time due to competition, leading markets to mistakenly overvalue long-term earnings growth.

Impact on U.S. Productivity and GDP

Despite these risks, AI holds considerable potential for enhancing U.S. productivity. Initial estimates suggest an increase of approximately 1.5 percentage points over a ten-year span. Such a boost could eventually elevate U.S. GDP and corporate earnings by about 15%.

As the economy and the AI investment sector remain robust, market optimism is likely to persist. However, outside of hardware, the current profitability of AI remains constrained, which may pose challenges if anticipated benefits do not materialize promptly.