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According to Goldman Sachs, the spike in AI stocks is here to stay, and reflects the beginning of a new tech wave, not a bubble.
Global investment banking and financial services firm Goldman Sachs (NYSE: GS) has stated that the current explosion in artificial intelligence (AI) adoption is not a bubble. Despite worries that the spike in AI interest and related tech stocks might be weak, Goldman Sachs states that the popularity of these stocks is more of a revolution than a bubble.
Some analysts believe the pump in tech stocks from the ongoing AI boom might eventually pass quickly. However, Goldman Sachs thinks otherwise. In a Monday publication, Goldman Sachs admits that current valuations in the tech sector are high “by historic standards”. It also noted that the current P/E (price-to-earnings) ratio in the sector is at the top, especially when compared with the 10-year median and range. However, according to Goldman Sachs Research Chief Global Equity Strategist Peter Oppenheimer, the substantial rally in stocks points to a bubble. He said:
“We believe we are still in the relatively early stages of a new technology cycle that is likely to lead to further outperformance.”
Oppenheimer however advised investors to carefully choose companies using the PEARLs framework. The framework classifies AI stocks into five groups. These include the Pioneers, Enablers, Adapters, Reformers, and Laggards. He believes that although knowing how successful an AI company would be is impossible, the PEARLs classification helps investors figure out which ones are the most likely to succeed.
Goldman Sachs is Optimistic about AI
Goldman Sachs is also bullish about AI technology and its positive effects on the S&P 500 index. Speaking to CNBC in May, Senior Strategist Ben Snider said AI could increase general productivity by 1.5% every year over the next 10 years. Snider believes this could also increase S&P 500 profits by 30% or more in the same time frame. According to Snider, many factors that contributed to an increase in S&P 500 earnings might be waning. However, he notes that AI has now presented a lot of optimism via productivity enhancements. Snider said:
“It’s clear to most investors that the immediate winners are in the technology sector. The real question for investors is who are going to be winners down the road.”
Goldman Sachs is also testing AI tools internally. The company’s Chief Information Officer Marco Argenti revealed that Goldman is working on a tool that helps developers with writing code. Argenti however specified that the tool is still in the experimental stage and not ready for production.
As part of the AI push, Meta Platforms Inc (NASDAQ: META) is reportedly developing an open-source AI system that will be more powerful than OpenAI’s GPT-4. The system is also expected to have twice the capacity of Llama 2, an AI model introduced in July by Meta and Microsoft Corporation (NASDAQ: MSFT). Meta should begin training for the new system in 2024 and will likely use Nvidia’s H100s chips to develop the tool. The Facebook parent recently increased investment in AI chips developed by Nvidia Corporation (NASDAQ: NVDA).