AI Will Send Profits Skyward Over the Next 10 Years, Goldman Says

Profit margins have been shrinking lately, owing to higher general inflation, labor costs and interest rates, plus business cutbacks to offset a long-anticipated recession. The net profit margin for the S&P 500 dipped to 11.2% in this year’s first quarter from its recent peak of 13.0% in 2021’s second period, per FactSet Research.

Artificial intelligence to the rescue. It could boost margins by four percentage points over the next decade, according to Goldman Sachs, which is very bullish on AI’s economy-enhancing prospects. The resulting fatter earnings likely would be a boon for equities, Goldman argued in a note.

If so, that would be an unexpectedly great news for the stock investors—as strategists’ market outlook is uninspiring.

Over the next 10 years, for instance, Vanguard Investments predicts U.S. equities will climb 6.4% annually, amid profit margin declines. That expected market showing falls short of the 11.6% that the S&P 500 scored over the past 10 years (a figure that includes 2022’s rout).

The effect of AI on business and the economy has been a big topic on corporate earnings calls in the last quarter, with 1,600 mentions, a whopping 2.5 times the volume of the prior-year period, a Bloomberg analysis showed.

The major thrust of AI will be the way it fuels productivity, the Goldman note concluded. The four-point projected increase is based “on the historical relationship between productivity growth and corporate profitability,” stated the report, written by Goldman strategist Ben Snider and his team.

In the short term, however, Goldman does not anticipate an immediate AI payoff. It expects the S&P 500 profit margin to slide 0.36 points this year and rise just 0.11 in 2024 The Snider report cautioned that their strategists’ rosy scenario for AI could be disrupted by government regulation and other unforeseen obstacles.

Over the longer term, in Goldman’s view, the likely bounty from AI is inspiring. A separate Goldman economic analysis, by economists Joseph Briggs and Devesh Kodnani, predicted that AI will increase world gross domestic product by 7% over the next 10 years, expanding labor productivity growth by 1.5% yearly. While many current jobs will be destroyed in the process, they wrote, many more will be created.

At that point, there will be plenty of flush consumers willing to spend on goods and services, and thus pump up profits.