Goldman says AI ‘the biggest potential long-term support’ for S&P 500 profit margins

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The slowdown has meanwhile slowed down with Q1 margins coming in above Street expectations and in line with pre-COVID levels.

“Resilient revenues, slowing input cost inflation, and a weakened USD suggest margins should stabilize in coming quarters. Our macro model points to just a 36 bp decline in the S&P 500 net margin in 2023 to 11.3%,” the analysts said in a client note.

On a more negative note, the analysts don’t see “substantial” potential for near-term margin expansion.

“Wage growth, interest rates, and inventories remain elevated. We expect just an 11 bp increase in the S&P 500 net margin in 2024, versus the bottom-up consensus estimate of 96 bp. The primary near-term downside risk to profit margins is that the economy falls into recession,” they added.

They are also cautious on the long-term margin expansion as past drivers aren’t likely to provide much of a boost in coming years.

“Without continued profit margin expansion, S&P 500 returns risk falling below the long-term trend.”

However, the surge in the use of artificial intelligence (AI) tools could prove to be “the biggest potential long-term support for profit margins.”

“Our economists’ productivity estimates suggest AI could boost net margins by nearly 400 bp over a decade. But uncertainty around both the eventual economic impact of AI and the regulatory response it may elicit is high,” Goldman analysts concluded.