Artificial intelligence could deliver “the biggest potential long-term support for profit margins” in the coming years, according to Goldman Sachs strategists, helping to make up for a likely diminished impact of traditional margin tailwinds.
The Goldman strategists estimate that AI could boost net margins in the S&P 500 index
SPX,
by about 4 percentage points over a decade, as the technology promises to drive efficiency benefits.
“The relatively stable share of revenues allocated to SG&A [sales, general and administrative] expenses in recent decades, in contrast with large declines in other input costs, underscores the potential gain to profitability from AI,” the strategists wrote in a Wednesday report.
See also: As Alphabet flexes its AI prowess, there’s a ‘new elephant in the room’ for Google
AI promises to be a margin tailwind at the same time that S&P 500 companies face “mounting headwinds” in other areas. The strategists note that net margins for the S&P 500 have risen by about 7 percentage points since 1990, helping to drive sizable price gains for the index, but they worry the traditional drivers of that margin growth won’t play such a big role in the future.
For example, cost of goods sold drove 70% of the increase in margins over that period, according to the Goldman
GS,
team, while tax and interest-rate benefits chipped in the rest.
“Each of these drivers threatens to reverse in the years ahead,” the strategists wrote. “Without continued profit margin expansion, S&P 500 returns risk falling below the long-term trend.”
While AI could give profits a lift, the strategists caution that it remains unclear what governments will do to rein in the technology.
“In addition to the uncertainty around the eventual impact of AI on economic activity, the potential response of government policy to the widespread adoption of AI means the net long-term effect on corporate profits is difficult to predict,” they wrote.
On Tuesday, OpenAI Chief Executive Sam Altman was among witnesses at a Senate hearing that discussed the prospect of AI regulation.
Opinion: Congress and tech seem open to regulating AI efforts, but that doesn’t mean it will happen
