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Widespread adoption of artificial intelligence software has the potential to power a full decade of productivity growth that leaves stocks as the clearest beneficiary in financial markets, according to economists at Goldman Sachs.
In a note released on Thursday, the Wall Street firm lays out the likely impact of AI on markets, starting with the view that machine-generated intelligence could leave annual productivity growth in the U.S. and other major economies as much as 1.5 percentage points higher than it otherwise would be. That would be on a scale comparable to the two major innovation-driven, productivity booms seen since 1900 — which came with the adoption of electricity, as well as the personal computer plus Internet.
Stocks should rise based on a higher outlook going forward for U.S. gross domestic product and corporate profits, though much will also depend on whether the AI-related productivity boost is expected or comes as a surprise, according to Goldman Sachs senior markets advisor Dominic Wilson and researcher Vickie Chang. They said the U.S. dollar may also benefit on the margins, along with other major developed-market currencies, and that commodity prices should trend higher over time. The impact on interest-rate markets is more ambiguous, though.
Source: Goldman Sachs Global Investment Research
“Although equities are the most obvious winner, aggregation constraints place limits on the plausible boost from even a large productivity boost. GDP and earnings will end up on a meaningfully higher track, but it is hard to see more than 10-15% U.S. equity upside from this source,” Wilson and Chang wrote.
“In both the 1920s and the 1990s, those valuation limits were violated for a while and large bubbles ensued,” they said. “Sustained productivity booms may be more prone to those bubble dynamics, so an AI-driven boost could raise this risk.”
Whether an AI-fueled productivity boom comes is unexpected will matter within markets, according to Wilson and Chang. The more anticipated such a boom is, the more likely any gains in stocks will be pulled forward because investors will reprice equities ahead of time, according to Wilson and Chang.
By contrast, higher productivity growth that continues to surprise investors, companies, consumers, and policy makers means stocks will accrue gains more gradually — and raises the risk that the Federal Reserve’s monetary policy will remain tighter than needed, they said.
Broadly speaking, currencies originating from developed markets like the U.S. —which will likely benefit from an AI-generated productivity boom sooner or by a bigger magnitude than emerging markets — should appreciate, according to the note from Goldman Sachs
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Meanwhile, commodity markets should see upside risk to prices over time, helped by stronger global demand.
As of Thursday, financial markets were mostly focused on the latest signs of continued strength in the U.S. labor market, and how that might impact the Fed’s policy announcement next Wednesday. Stocks
DJIA,
COMP,
were mostly lower in New York afternoon trading, while 1-year
TMUBMUSD01Y,
through 30-year Treasury yields
TMUBMUSD30Y,
all moved higher.
