Goldman Sachs: State of the AI Boom — Market Ahead of the Macro
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Goldman Sachs updates its comparison of the current artificial intelligence investment boom to the 1990s tech bubble. The report notes that AI investment as a share of GDP has now surpassed 1990s peaks, with hyperscaler capital expenditure expectations rising nearly 80% over the past six months. However, unlike the late 1990s, broader macroeconomic imbalances have not yet materialized.
Key macro indicators remain stable. Corporate profit margins are at historic highs, unit labor costs and wage growth remain moderate, and corporate financing needs have not deteriorated significantly. Additionally, the current account deficit has narrowed rather than widened, suggesting international imbalances are not escalating.
Despite these stable macro conditions, market valuation concerns persist. The cyclically adjusted Shiller price-to-earnings ratio sits just below 1999-2000 levels. This year's equity market gains have been primarily driven by rising earnings expectations rather than pure valuation expansion.
Goldman Sachs highlights that AI-related market capitalization has exceeded baseline present value estimates. While this can be justified by optimistic assumptions regarding AI companies capturing larger shares of productivity gains, the risk of excessive trend extrapolation remains. The AI boom could also mask underlying macro vulnerabilities in non-AI sectors.
The firm advises limiting downside risk, noting that elevated valuations make markets increasingly sensitive to negative news. Equity volatility is expected to rise, with interest rates potentially facing larger eventual declines.
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