Goldman Sachs warns: AI boom boosts corporate profitability supporting US stock bull market but future fears of backlash could impact returns for tech giants.

Goldman Sachs Group, Inc. warns that the artificial intelligence (AI) investment boom is helping S&P 500 companies achieve historically high profitability, but the massive spending driving this boom could ultimately suppress the investment returns of tech giants. In a report released on June 12th, Goldman Sachs Group, Inc. strategist Ben Snider stated that record corporate profitability has become a key pillar supporting the high valuations of the US stock market. Currently, the expected price-to-earnings ratio of the S&P 500 index is around 21 times, at the 87th percentile of historical distribution since 1980; meanwhile, return on equity (ROE) has climbed to a record 22%. Corporate profitability driving US stock gains Goldman Sachs Group, Inc. points out that despite a decrease in valuation multiples, the S&P 500 index has risen by 9% year-to-date. The main driver of market increases is earnings growth. Future 12-month earnings forecasts, which are unanimously expected to rise by 17%, have led to a contraction in the market's price-to-earnings ratio from 22 times to 21 times. Goldman Sachs Group, Inc. estimates that for every 1 percentage point change in the S&P 500 index ROE, there is typically a corresponding 1 times change in the market's price-to-earnings ratio, underscoring the importance of profitability for future stock market returns. The recent significant increase in profitability has mainly come from margin expansion, especially among large tech companies. Goldman Sachs Group, Inc. estimates that the seven tech giants including NVIDIA Corporation (NVDA.US), Microsoft Corporation (MSFT.US), Alphabet Inc. Class C (GOOGL.US), Amazon.com, Inc. (AMZN.US), Meta (META.US), Apple Inc. (AAPL.US), and Broadcom Inc. (AVGO.S), currently achieve a combined 44% ROE, an increase of 9 percentage points from three years ago. Winners and losers in AI The report emphasizes that a clear divide is emerging between semiconductor manufacturers and hyperscalers who foot the bill for AI infrastructure construction. Semiconductor manufacturers are among the biggest beneficiaries of the AI spending boom. Strong demand combined with limited supply has driven their profitability to historic highs. Goldman Sachs Group, Inc. points out that the net profit margin of the semiconductor industry is close to 50%, mainly due to strong pricing power and a solid competitive advantage. In contrast, hyperscalers are facing significant costs in the race to build AI infrastructure. Goldman Sachs Group, Inc. predicts that by 2026, capital expenditures for major cloud service operators will reach around $770 billion, equivalent to about 100% of their operating cash flow. This spending is reshaping their financial structures. As businesses continue to build data centers, asset turnover has decreased; depreciation expenses are rising; and some companies are raising investment funds by increasing debt and issuing new shares. Goldman Sachs Group, Inc. predicts that the proportion of depreciation and amortization expenses as a percentage of revenue for hyperscalers will increase from 7% in 2022 to 12% in 2027. As a result, market consensus forecasts show that the ROE of the largest tech companies will decrease by an average of 7 percentage points next year. According to the report, Apple Inc. is expected to see the largest decline in ROE, followed by NVIDIA Corporation, Alphabet Inc. Class C, and Meta. AI remains a long-term bet Despite short-term pressures, Goldman Sachs Group, Inc. does not believe that the AI spending cycle will have purely negative implications for profitability. Goldman Sachs Group, Inc. points out that improving revenue expectations, increasing customer order backlogs, and expanding profit margins of major cloud service providers indicate that AI investments are beginning to pay off. Goldman Sachs Group, Inc. analysts also expect that as the cost of computing each Token continues to decline and pricing stabilizes, the economic benefits of AI models will continue to improve. For the overall economy, Goldman Sachs Group, Inc. believes that AI-driven productivity gains are likely to become an important source of long-term profit growth. Recent earnings conference calls show that over half of the S&P 500 component companies have mentioned plans to improve productivity related to AI, but only a few companies have quantified its financial impact. Goldman Sachs Group, Inc. expects that as AI becomes more widespread, overall revenue and per capita profits of US companies will ultimately increase. Valuation depends on profitability For investors, the key question is whether the record profitability can be sustained. Goldman Sachs Group, Inc. believes that the future trend of stock market valuations will largely depend on whether corporate returns can be maintained at current levels. Although AI infrastructure investments may temporarily pressure the profitability of large tech companies, the bank believes that the broader productivity gains driven by AI could ultimately offset some of the negative impact. Currently, record profitability remains one of the most compelling reasons for the US stock market to trade far above historical valuation levels.