- Artificial intelligence is arguably the top story in markets so far this year.
- However, investors aren't pricing the future impact of AI into the S&P 500 today.
- Here are 24 top stocks to buy for exposure to AI, according to Goldman Sachs.
Although artificial intelligence (AI) has been on everybody's minds lately, Goldman Sachs thinks investors may still be underselling how influential the technology can be.
The technology sector has carried the broader market so far in 2023 as enthusiasm about AI builds. In fact, Goldman Sachs strategists recently noted that as of June 1, only seven large-cap tech stocks were responsible for all of the S&P 500's year-to-date gains.
But a swelling AI wave won't just lift the tech sector in the years to come.
Goldman Sachs expects that AI will dramatically improve economic productivity and corporate earnings across the market.
In a June 6 note, equity strategist Ryan Hammond wrote that if AI improves business productivity by 1.5 percentage points per year for the next decade, as Goldman anticipates, then that would mean US stocks are currently undervalued by 9%. That's based on a 5.4% compound annual growth rate for S&P 500 earnings over the next 20 years.
And even if the AI hype is overblown in the near term, Goldman still thinks the S&P 500 should trade 5% higher. A best-case scenario for AI-driven productivity should put the index up by 14%.
"At the S&P 500 index level, neither the current level of the equity risk premium (ERP) nor long-term EPS growth expectations indicate an equity market that is overly optimistic on potential AI adoption benefits," Hammond wrote. "Both metrics are roughly in line with their historical average and less extreme than during the height of the Dot Com Boom."
Any reference to the dot-com bubble of the early 2000s can give investors chills — especially in this context. Several market commentators, including Art Cashin at UBS, have warned that the euphoric expectations about AI are similar to the sentiment about internet stocks 20 years ago.
"Historical precedent from the Dot Com Boom shows the perils of high expectations," Hammond wrote. "Even though most TMT [technology, media, and telecommunications] companies were still able to generate strong sales growth between 2000 and 2002, the failure to meet lofty investor forecasts led to a sharp 50%+ contraction in P/E multiple and a plunge in share prices."
While no two markets are the same, Hammond noted that Nvidia's current valuation is similar to dot-com darlings like Microsoft and Intel near the height of the tech bubble. That implies that caution is warranted when investing in the semiconductor company, even though it's thriving.
However, even if investors are getting carried away about Nvidia's success, Goldman Sachs isn't worried that US stocks broadly are in bubble territory.
"At the index level, the current equity risk premium (ERP) and long-term EPS growth expectations are roughly in line with historical averages, suggesting investor optimism on AI adoption is not at extreme levels," Hammond wrote.
Other than a heavy reliance on AI hype, risks to US stocks right now include high interest rates, recession risk, and a more muted impact of AI on productivity due to government responses like regulation or a higher corporate tax rate, according to Goldman Sachs.
24 top AI stocks to buy
Investors seem to have an insatiable appetite for AI-related investments right now, and Goldman Sachs has some ideas for how they can gain exposure to the revolutionary technology.
In addition to listing 15 options trades to make on AI stocks, the firm put together a basket of two dozen companies that are either tied to AI or are enabling new advances in industries like software, semiconductors, technology hardware, media, internet, and IT services.
Below are the 24 stocks in Goldman Sachs' AI basket, along with the ticker, market capitalization, and forward price-to-earnings (P/E) ratio for each.
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