With the 2024 U.S. presidential election over, Wall Street can now focus on the future of artificial intelligence, the Federal Reserve’s interest rate cut cycle and an economy with lower inflation. As was the case during the coronavirus pandemic, when historically low interest rates sent markets to new highs only to collapse when rates were raised in 2022, the changes now taking place should will also affect investors for at least the next two years. .
Naturally, it is worth examining what professional analysts are projecting about the future. On this front, investment bank Goldman Sachs recently updated its long-term forecast for the US stock market. In a search report Titled “Global Strategy Paper No. 71,” the bank stressed that the upgrade was necessary due to market concentration. This “concentration” refers to growing investor interest in large- and mega-cap stocks, primarily due to excitement about artificial intelligence.
Since the biggest tech companies are also the biggest investors in AI, market returns have also been focused on them. As an illustration, consider the performance of the flagship S&P index which is up 30.64% over the last twelve months. Now consider the performance of Wall Street’s leading AI GPU stock, the software company behind Windows, the social media giant that owns Facebook, Jeff Bezos’ e-commerce company, and the world’s leading search engine provider . Their stocks gained approximately 192.21%, 12.66%, 69.01%, 42.44% and 27.63% during the same period. As a result, most large-cap stocks have boosted market returns.
According to Goldman, this bifurcation implies that the flagship equal-weighted S&P index is likely to outperform the market-cap-weighted index “by 200 to 800 bps annualized” over the next decade, or between 2024 and 2034. To build its argument, the bank cites historical data that also covers the dotcom boom of the late 1990s and early 2000s. This bubble is key to understanding today’s market because it shares some characteristics with the surge in artificial intelligence stocks following OpenAI’s release of ChatGPT and Jensen Huang’s prediction that a trillion dollars in AI capacity calculation is waiting for an upgrade.
GS points out that the S&P equal-weighted index tends to significantly underperform the market-weighted index before the trend reverses. He cites the market performance of the two indices before the bubble burst to point out that “the trough in the 10-year relative underperformance of the equal-weighted index versus the cap-weighted index is is produced during the period before the dotcom bubble. (1990-2000). This saw the Equal Weight Index lag the Market Weight Index by four percentage points (pp) at the trough or bottom. After the trough, the differential reversed and the equal-weighted index outperformed its counterpart by almost seven points (pp). According to Goldman, the four-point deficit “has been closed over the past decade (2014-2024E) as the overall index has been fueled by a few mega-cap tech stocks and AI euphoria.”
By linking historical performance trends to investor concentration in mega-cap and AI stocks, the bank believes that this “extreme level of market concentration (99th percentile) suggests that the magnitude of outperformance at equal weighting over the next decade is also expected to be above average. How strong can it be? Well, GS points out that the equal-weighted index can outperform the market-weighted index by 8 percentage points. On the other hand, since this is the most optimistic forecast, the bank notes that if the performance of the equal-weighted index returned to its historical average of the last 50 years, then “this would imply annualized outperformance less spectacular by 2 percentage points.
Although stock market calculations are all good, other factors also determine their performance. In November, the headlines only talk about the presidential election. Post-election stock performance has seen some companies, like Elon Musk’s automaker, post staggering gains. Goldman’s Shawn Tuteja, who works with exchange-traded funds (ETFs) and baskets, shared some thoughts on which sectors performed well post-election and whether that outperformance will continue. In a podcasthe pointed out that “the most important themes we saw play out in the aftermath of Wednesday’s election were regional banks and bank takeovers.” He shared that “all sectors linked to deregulation have benefited.” These include “energy, traditional energies versus renewable energies”, the former up 4% while the latter loses around 10%.
Tuteja added that “the resilience and strength of US technology in the last two days after the election” was a standout compared to the market’s post-election performance in 2016. Looking ahead, the Goldman analyst is optimistic. He believes that “what I would expect over the next few weeks is a continuation, at a factorial level, of the themes that worked after the election.” Indeed, “it takes time for the money to be deployed and for the themes to materialize”. According to him, in 2016, “regional and large banks rallied for months after the election and outperformed all other sectors of the market.” Furthermore, while broader markets may have calmed on the surface, Tuteja points out that “beneath the surface, these sector movements are becoming much more violent as market correlations break down, as people begin to choose the winners and losers under the new government regime. policies. »
In this dynamic environment that will see the Fed continue to tailor its interest rate decisions to the economy and businesses adapt to looser monetary policy, businesses may also increase their cash spending. In a note on spending, Goldman said companies in the S&P benchmark could increase spending to 11% next year, from 8% in 2024. This will be driven by rising profits, with the bank estimating that “earnings growth alone can explain 40% of the growth in cash expenditures next quarter.”
Just as it expects stock performance to broaden in the future, the bank also posits that “typical stocks should close the earnings growth gap with large-cap technology stocks.” Finally, on the theme of mergers and acquisitions, which have slowed in the wake of historic interest rates, GS is optimistic. He expects “cash M&A to rebound 20% in 2025” but warns that “the potential for tariffs, regulatory changes and corporate tax reform could significantly change these forecasts.” “.
Our methodology
To compile our list of Goldman Sachs’ top growth investing stocks, we used the bank’s recent list of stocks and selected those with a growth investing ratio of 70% or higher. This ratio is defined as the ratio of capital expenditure and R&D expenditure excluding depreciation to a company’s operating cash flow.
For these stocks, we also mentioned the number of hedge fund investors. The reason is simple: our research has shown that we can outperform the market by imitating the stocks selected by the best hedge funds. Our quarterly newsletter strategy selects 14 small- and large-cap stocks each quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
A financial analyst in his office, monitoring the daily performance of the stock market.
Growth investment rate: 92%
Number of hedge fund holders: 108
Advanced Micro Devices, Inc. (NASDAQ: AMD) is a semiconductor designer that designs and sells CPUs and GPUs. Its products are used by consumers and businesses. In today’s AI era, Advanced Micro Devices, Inc. (NASDAQ: AMD) is one of the few companies capable of offering both CPUs and GPUs for AI computing. This helps take advantage of cost constraints that NVIDIA’s GPU customers might face or for businesses looking to move away from Intel processors. However, Advanced Micro Devices, Inc.’s (NASDAQ:AMD) limited resources also mean the company struggles to compete at scale with its larger competitors. As a result, it is a perpetual underdog in an industry where high volumes often determine branding and pricing power. Advanced Micro Devices, Inc.’s (NASDAQ:AMD) third-quarter results led the company’s Gaming business to experience a sharp drop in operating profit of over 90% and shortly after, the company announced it would lay off 4% of its workforce. . Sustained revenue from AI customers is key to the Advanced Micro Devices, Inc. (NASDAQ:AMD) hypothesis.
“Regarding our Data Center AI business, Data Center GPU revenues have increased as MI300X adoption has grown among cloud, OEM and AI customers. Microsoft and Meta expanded their use of MI 300X accelerators to power their internal workloads during the quarter. Microsoft now widely uses the MI 300X for several co-pilot services powered by the GPT 4 family of models.
Overall, AMD ranks 22nd on our list of top Goldman Sachs growth investors. While we recognize AMD’s potential as an investment, our conviction lies in the belief that AI stocks hold more promise in terms of higher returns and in a shorter time frame. If you’re looking for an AI stock that’s more promising than AMD but trades at less than 5x earnings, check out our report on cheapest AI stock.
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