Moody's Analytics projects that the impact of artificial intelligence (AI) on the S&P 500 will be limited, with average annual returns expected to decline significantly in the coming years. According to the firm, while AI is likely to reshape businesses, it may not translate into substantial stock market gains. Moody's forecasts average annual growth of 6.2% from 2035 to 2030 and just 3.8% from 2030 to 2035, compared to an 11.7% annual return from 2015 to 2025. The firm warns that current stock valuations are reminiscent of periods preceding significant market downturns, such as the 1929 crash and the dot-com bubble.
Profit Margins and AI Value Chain
In a related analysis, Apollo Chief Economist Torsten Slok highlighted a disparity in profit margins within the AI value chain. He noted that while companies producing AI models and applications have the lowest profitability, those involved in silicon and equipment, such as chipmakers, boast profit margins as high as 41%. Slok emphasized that the profits attributed to the AI boom are largely funded by investor capital rather than generated from consumer demand. “AI boom’s profits are currently being funded by investors rather than earned from customers,” Slok said, warning that this could lead to instability if AI financing slows down.
Goldman Sachs anticipates that AI investments could exceed $1 trillion by 2026, yet the technology has yet to demonstrate significant improvements in economic productivity or profit margins outside of major players like Nvidia and AMD. The current market dynamics suggest that while the AI sector is attracting considerable investment, the returns may not meet investor expectations.
Related coverage: AMD Reports Strong Q2 Earnings Amid AI Market Growth Outlook.
The muted outlook for AI's contribution to market returns could affect technology stocks and indices reliant on AI growth, particularly those heavily invested in AI applications and models. Investors may reassess their positions in AI-related equities as the potential for significant profit growth appears limited. Watch for further developments in AI investment trends and their impact on corporate earnings reports in the upcoming quarters.
Based on reporting by: businessinsider.com, fortune.com