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Goldman: S&P 500 is undervalued because of the AI boom

Goldman Sachs sees a good bit of upside to the S&P 500 (^GSPC) as new artificial intelligence technology takes hold inside of corporate America.

"We assume that widespread AI adoption occurs in 10 years and lifts trend real GDP growth by 1.1 percentage point for 10 years. In this scenario, earnings per share in 20 years would be 11% greater than our current assumption and the S&P 500 fair value would be 9% higher than today, holding all else equal," strategist Ryan Hammond wrote in a new client note on Wednesday.

The S&P 500 currently stands at 4,290 — Hammond's projection sees the benchmark index rising to around 4,719.

Hammond cautions, though, that any earnings lift to companies from AI — and subsequent S&P 500 gain — are hard to measure. He does expect upside either way as companies squeeze out margin-boosting productivity gains from the tech.

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"However, a wide degree of uncertainty exists around the potential productivity boost and the ability of firms to translate AI into increased profits for 10 years. Based on a range of productivity scenarios, we estimate the benefit to S&P 500 fair value could be as small as +5% vs. current levels and as large as +14%," Hammond added.

The poster child for the potential profit impact to companies — and perhaps the inspiration for Hammond's note — is none other than chip king Nvidia (NVDA).

FILE - Nvidia Co-founder, President and CEO Jensen Huang speaks at the Taiwan Semiconductor Manufacturing Company facility under construction in Phoenix, Dec. 6, 2022. AI chips and their leading designer, Nvidia, are now at the center of what some experts consider an AI revolution that could reshape the technology sector — and possibly the world along with it. (AP Photo/Ross D. Franklin, File)
FILE - Nvidia Co-founder, President and CEO Jensen Huang speaks at the Taiwan Semiconductor Manufacturing Company facility. (AP Photo/Ross D. Franklin, File) (ASSOCIATED PRESS)

Nvidia's recent outlook truly surprised the investing masses and unleashed a fresh push higher in the already red-hot Nasdaq Composite (^IXIC).

The company said late in May it expects second quarter revenue to come in at about $11 billion, plus or minus 2%. Wall Street was anticipating $7.2 billion.

The guidance helped take Nvidia's market cap to over $1 trillion, though it has since settled to about $955 billion.

As for the AI-stock-heavy Nasdaq Composite, it's now up 33% year to date compared to a 12% gain for the S&P 500.

Nvidia founder and CEO Jensen Huang told analysts the very upbeat outlook reflects a fundamental shift to accelerated computing. In turn, that places Nvidia's chips that power generative AI in high demand.

"We're seeing incredible orders to retool the world's data centers. And so I think you're seeing the beginning of, call it, a 10-year transition to basically recycle or reclaim the world's data centers and build it out as accelerated computing," Huang said on an earnings call. "You'll have a pretty dramatic shift in the spend of a data center from traditional computing and to accelerate computing with SmartNICs, smart switches, of course GPUs and the workload is going to be predominantly generative AI."

Goldman's Hammond thinks Nvidia'a shocking guidance was a "galvanizing event for 2023."

"Investors always debate the long-term growth prospects of individual stocks, but it is highly unusual that a large company announces such a quantum leap in its own business outlook. Simply put, the AI-inspired demand for Nvidia's advanced chips is accelerating so rapidly that the consensus sales forecast published earlier this year is now totally obsolete," Hammond said.

Brian Sozzi is Yahoo Finance's Executive Editor. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn. Tips on the banking crisis? Email brian.sozzi@yahoofinance.com

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