UPDATE 2-AI disruption puts focus on long-term value of US equities, Goldman Sachs says

AI's potential to disrupt businesses ​has sparked concerns over the dependency of U.S. equity ​valuations on long-term growth forecasts, particularly in the ‌software ​sector, Goldman Sachs said. "Terminal value" - a company's worth beyond the next 10 years based on estimated earnings - accounts for about 75% of the S&P 500's equity value, near ‌a 25-year high, the Wall Street brokerage said.

"Today's share of value in the terminal value is elevated versus history and mirrors other periods where investor long-term growth expectations were increasingly optimistic, including the dotcom boom," Goldman Sachs said in a note on Thursday. Investor concerns ‌around AI disruption have been building since Anthropic launched new tools that automate tasks across areas such as marketing and ‌data analytics, raising questions about the pressure such products could put on traditional software providers.

The S&P 500 software and services index has dropped about 17% so far this year, broadly driven by fears that new AI tools could hurt future revenue growth and profit margins. At the same time, Big Tech - ⁠Alphabet, Microsoft , ​Meta and Amazon - have set ⁠aside billions of dollars for AI capex over three years in their intense fight for industry dominance, but investor concerns over immediate returns linger.

The big ⁠four cloud companies are set to spend around $600 billion on AI this year, a historic outlay that has squeezed cash flows and tested ​Wall Street's patience, even as their stocks have largely held up on expectations of future gains. Goldman estimates that ⁠every one percentage point decline in assumed long-term growth would cut the combined enterprise value of S&P 500 companies by about 15%.

High-growth stocks would see ⁠a ​much larger hit, with valuations falling by roughly 29%, compared with about 10% for low-growth equities. "The value of a high-growth company is especially sensitive to changes in its long-term growth outlook," Goldman added.

Goldman expects the debate around AI disruption, ⁠and therefore uncertainty about many companies' terminal values, will persist for at least several quarters. "The threat of disruption will likely represent ⁠a persistent overhang until later stages ⁠of AI adoption," they added.

Goldman noted that in recent quarterly earnings calls, only 5% of S&P 500 firms discussed financial metrics beyond five years. "We think more managements should prioritize discussions ‌of the long-term outlook (to ‌investors)," Goldman added.

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