Professional Documents
Culture Documents
US Equity Views - The Next Phases of The AI Trade
US Equity Views - The Next Phases of The AI Trade
US Equity Views
AI optimism across US equities appears high, but not yet Tech Bubble or Ryan Hammond
+1(212)902-5625 |
post-COVID high. First, our estimate of market-implied long-term growth [email protected]
Goldman Sachs & Co. LLC
expectations has risen to 11%, above the long-term average of 9%, but still below
Daniel Chavez
the level during the Tech Bubble (16%) and late 2021 (13%). Second, among the +1(212)357-7657 |
[email protected]
largest 10 TMT stocks, FY3 EPS growth expectations for the typical stock equal Goldman Sachs & Co. LLC
15%, modestly above the S&P 500 median of 11% but lower than the typical TMT David J. Kostin
+1(212)902-6781 | [email protected]
stock in March 2000 (24%) and October 2021 (18%). Third, the valuation of the Goldman Sachs & Co. LLC
largest 10 TMT stocks equals 28x, which pales in comparison to the peak of the Tech Ben Snider
+1(212)357-1744 | [email protected]
For the exclusive use of Goldman Sachs Clients
0d74b2afc2134a2d9694ccd9a530a507
harness AI technology to improve productivity and realize efficiency gains (software
and services, commercial and professional services).
Few stocks have kept pace with NVDA’s rally, but stocks in Phase 2 and Phase
3 have reflected more signs of AI optimism than stocks in Phase 4. We expect
investors will trade Phase 2 and Phase 3 faster than Phase 4, as many companies in
these two phases are necessary for every other company to use the technology to
improve productivity. Within Phase 2, Foundry & Integrated Device Manufacturers
have a relatively attractive setup of strong expected EPS growth with modest
valuations. Security stocks have strong earnings expectations, but could be
challenged by already elevated investor expectations. Select Utilities could represent
AI opportunities that are unpriced by analysts or investors.
Investors should consider this report as only a single factor in making their investment decision. For Reg AC
certification and other important disclosures, see the Disclosure Appendix, or go to
www.gs.com/research/hedge.html.
Goldman Sachs US Equity Views
120% 50x
6m return
99% Returns and valuations of AI phases
100% (median stock)
40x
80%
31x 31x 30x
60%
FY2 P/E
(right axis) 19x
20x
40% 16x
21% 10x
20% 14%
10%
0% 0x
Phase 1 Phase 2 Phase 3 Phase 4
NVDA Infrastructure Enabled revenues Productivity
(Exhibit 12) (Exhibit 16) (Exhibit 21)
For the exclusive use of Goldman Sachs Clients
0d74b2afc2134a2d9694ccd9a530a507
14 March 2024 2
Goldman Sachs US Equity Views
The focus on artificial intelligence (AI) has re-intensified in 2024. Initial ebullience
about AI in 2023 drove a massive increase in public and investor focus on AI, as
measured by search volumes and news stories. These measures plateaued in 2H 2023,
albeit at a high level, but have surged again in 2024. Similarly, the share of S&P 500
companies mentioning AI on earnings calls dipped slightly from 35% in 2Q 2023 to 31%
in 3Q 2023. However, the share increased to 37% in 4Q 2023, led by Info Tech and
Comm Services.
Exhibit 1: Search interest in AI has surged again Exhibit 2: Mentions of AI on quarterly earnings calls ticked up
45 %
120
40 % 4Q23
100
Google Trends search Share of S&P 500 companies 37%
volume for AI 35 % mentioning "AI"
during quarterly earnings calls
80 30 % 3Q23
31%
25 %
For the exclusive use of Goldman Sachs Clients
60
20 %
40
15 %
20 10 %
5%
0
Dec-21 Jun-22 Dec-22 Jun-23 Dec-23
0%
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Source: Google Trends, https://www.google.com/trends, Goldman Sachs Global Investment Source: Goldman Sachs Global Investment Research
Research
Market-implied long-term growth expectations have risen, but have not reached
Tech Bubble or post-COVID levels. Similar to the residual income model approach
0d74b2afc2134a2d9694ccd9a530a507
used by Easton et al (2002), we use a cross-sectional regression of company return on
equity and price to book to solve for the market-implied long-term growth in residual
income (see Appendix for details). During the Tech Bubble, implied growth expectations
surged to 16%, above the long-term average of 9%, as investors applied unreasonably
high long-term growth expectations to companies. Today, the implied long-term growth
rate equals 11%, above long-term average but below the Tech Bubble period and
modestly below the level reached in late 2021 (Exhibit 3).
14 March 2024 3
Goldman Sachs US Equity Views
20 %
Tech
18 % Bubble Market-implied long-term
16% S&P 500 growth expectations
16 %
Post-
COVID
14 % 13%
Tax
reform
12 % 10%
8%
6%
4%
2%
0%
For the exclusive use of Goldman Sachs Clients
Among the largest stocks, nearer-term analyst estimates are optimistic, but
remain below the exuberance from the Dot Com Boom and late 2021. Among the
largest 10 TMT stocks, the typical company is forecast to deliver FY3 EPS growth of
15%, above the S&P 500 median of 11%. The distribution is anchored even lower, with
AMD and AMZN the outliers. At the height of the Tech Bubble, the typical TMT stock
was forecast to grow FY3 EPS by 24%, and in late 2021, the typical TMT stock was
expected to grow EPS by 18%.
0d74b2afc2134a2d9694ccd9a530a507
14 March 2024 4
Goldman Sachs US Equity Views
50%
25% Median
24%
20%
Median
SPX median 18% Median
15%
(15%) 15%
SPX median SPX median
10% MSFT (11%)
(10%)
AAPL NVDA
5%
0%
Dot Com Boom Post-COVID AI Boom
For the exclusive use of Goldman Sachs Clients
The valuations of the largest TMT stocks today are elevated but also remain well
below the Tech Bubble and valuations reached just a few years ago in 2021. The
forward P/E of the 10 largest TMT stocks reached a peak of 52x in March 2000
(including MSFT 60x, CSCO 133x, INTC 45x, ORCL 108x, and IBM 27x). Today, the 10
largest TMT stocks (including MSFT 32x, AAPL 25x, NVDA 36x, AMZN 40x, and GOOGL
20x) trade at 28x forward EPS. The valuation of these stocks pales in comparison to the
height of the Tech Bubble and the growth stock euphoria of 2021 (43x). Nonetheless,
the valuation of the 10 largest TMT stocks today still ranks in the 88th percentile vs.
0d74b2afc2134a2d9694ccd9a530a507
history and the yield gap between these stocks and nominal bond yields is negative.
14 March 2024 5
Goldman Sachs US Equity Views
Exhibit 5: Valuation of largest TMT stocks today pales in comparison to Tech Bubble
TMT defined as Info Tech, Comm Services, and AMZN
60x
52x
Median forward P/E
50x
10 largest
43x
TMT stocks
40x
30x 28x
20x
0x
1980 1985 1990 1995 2000 2005 2010 2015 2020 2025
For the exclusive use of Goldman Sachs Clients
0d74b2afc2134a2d9694ccd9a530a507
14 March 2024 6
Goldman Sachs US Equity Views
NVDA has been the largest near-term AI beneficiary, with earnings driving the
entirety of its 522% return since the start of 2023. NVDA sales appear on track to
increase by 300% in just 2 years. Despite AI optimism, the stock’s forward P/E is
virtually unchanged since the start of 2023.
Exhibit 6: NVDA sales have grown rapidly Exhibit 7: NVDA return since YE 2022 has been entirely
earnings-driven
$160 600 %
$143
NVDA sales 9%
$131 NVDA
$140 (consensus, $ billion) 20% 500 % Cumulative change
$109
since YE 2022
$120
79% 400 %
Forward EPS
$100
300 %
$80
$61
126% 200 % Price
$60
For the exclusive use of Goldman Sachs Clients
100 %
$40 $27 $27
61% 0%
Forward P/E
$17
$12 $11 53% 0%
$20 21% -7%
$0 (100)%
2018 2019 2020 2021 2022 2023 2024E 2025E 2026E Dec-22 Mar-23 Jun-23 Sep-23 Dec-23 Mar-24
Source: FactSet, Goldman Sachs Global Investment Research Source: FactSet, Goldman Sachs Global Investment Research
0d74b2afc2134a2d9694ccd9a530a507
than 50% for 5 consecutive years. In addition to realized fundamentals, the experience
from the Tech Bubble shows that failure to meet elevated expectations can be sufficient
to lead to a sharp valuation de-rating among the largest stocks (see US Weekly
Kickstart). We have previously shown that, on average, companies with high valuations
often struggle to grow into their multiples regardless of realized growth rates (see US
Weekly Kickstart).
14 March 2024 7
Goldman Sachs US Equity Views
Exhibit 8: It has historically been difficult to deliver consecutive Exhibit 9: Less than 1% of companies have maintained 50%+ EBIT
years of rapid sales growth margins for 5 consecutive years
since 1985, excluding Financials and Real Estate since 1985, excluding Financials and Real Estate
100% 3%
90% 91% Share of unique S&P 500 companies Share of unique S&P 500 companies
with fast sales growth for with >50% EBIT margins for
80% consecutive years 2.3% consecutive years
77%
70% 72% 10%+ sales
growth 2%
60%
55%
50%
43% 1.1%
40% 39%
31% 1%
30% 0.8%
20%+ sales 26%
23% 21%
20% growth 18% 0.5%
15% 14% 0.4%
11% 11% 0.3%
10% 9% 7% 0.2%
6% 0.1% 0.1% 0.1%
4% 3%
0% 0%
1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10
Consecutive years Consecutive years
Source: Compustat, Goldman Sachs Global Investment Research Source: Compustat, Goldman Sachs Global Investment Research
For the exclusive use of Goldman Sachs Clients
n “Phase 1” (NVDA) initially kicked off in early 2023 with the emergence of ChatGPT-4
and focused primarily on NVDA as the clearest near-term AI beneficiary within public
equity markets.
n “Phase 2” (Infrastructure) will focus on those companies beyond NVDA that are
involved in the infrastructure necessary to build AI. Based on our framework, this
phase includes semiconductor firms, cloud providers, data center REITs, hardware
and equipment companies, security software stocks, and utilities companies. See
Exhibit 12 and Appendix for constituents.
n “Phase 3” (Enabled revenues) will focus on AI “enabled” companies with business
0d74b2afc2134a2d9694ccd9a530a507
models that can incorporate AI in product offerings to boost revenues. This phase
aligns with management commentary and stock performance of many software and
IT services companies. See Exhibit 16 for constituents.
n “Phase 4” (Productivity gains) will focus on all companies harnessing AI technology
to improve productivity, with the largest potential efficiency gains in labor-intensive
industries with jobs more exposed to AI automation. Based on our previous work,
Software and Services and Commercial and Professional Services have the largest
potential earnings boost from widespread AI adoption via labor productivity. See
Exhibit 21 and our Long-term AI Beneficiaries basket (GSTHLTAI) for constituents.
Few stocks have kept pace with NVDA’s rally, but stocks in Phase 2 and Phase 3
have reflected more signs of AI optimism than stocks in Phase 4. Based on
performance and valuation, investors have already started to price subsequent phases
of the AI trade. An equal-weighted basket of Phase 2 stocks is up 14% during the past 6
months, largely driven by valuation expansion. The GS Global Banking & Markets (GBM)
AI Hardware (GSTMTDAT) basket seeks to capture a similar theme and the GBM Power
Up America (GSENEPOW) basket captures many of the Utilities stocks in Phase 2.
14 March 2024 8
Goldman Sachs US Equity Views
Phase 3 stocks are up 21%, primarily driven by valuation expansion. Phase 4 stocks
have seen limited valuation expansion. On average across all three phases, prices and
valuations have increased modestly during the past 6 months, suggesting the
broadening of the AI trade is in its early innings.
We expect investors will trade Phase 2 and Phase 3 faster than Phase 4, as many
companies in these two phases are necessary for every other company to use the
technology to improve productivity. The median stock in Phase 2 trades at 16x forward
earnings, compared with 31x for Phase 3 and 19x for Phase 4.
94 94 94
Sep-23 Dec-23 Mar-24 Sep-23 Dec-23 Mar-24 Sep-23 Dec-23 Mar-24
0d74b2afc2134a2d9694ccd9a530a507
4 Productivity 12 2 5 7 7 19
Source: FactSet, Goldman Sachs Global Investment Research
14 March 2024 9
Goldman Sachs US Equity Views
Phase 2: AI infrastructure
One aspect of the broader AI trade will focus on the companies involved in AI
infrastructure. Our analysis is primarily focused on US companies; we therefore use
Russell 3000 stocks with market caps over $2 billion as a starting universe. However, to
capture key non-US companies, we also include relevant MSCI AC World stocks with
market caps over $50 billion. The companies in each grouping below are based on a
combination of GICS classifications as well as company business descriptions, filings,
websites, and earnings calls. We acknowledge that this list may not be comprehensive
and some companies have diverse business models beyond AI.
1. Semiconductors: Chips are the critical component to be able to train and utilize
artificial intelligence.
o Design: Companies that own the IP and Electronic Design Automation
software used to design and analyze integrated circuits and printed circuit
boards.
For the exclusive use of Goldman Sachs Clients
o Fabless designers ex-NVDA: The design and marketing, but not the
manufacturing, of semiconductor chips.
o Integrated Device Manufacturers (IDMs) and Foundry: The manufacturing
of semiconductor chips.
o Memory: Companies that manufacture memory units that are critical
components of processors.
o Manufacturing Equipment: Companies that provide equipment needed to
manufacture semiconductor chips.
2. Data Centers (Real Estate): Companies that own and operate physical data centers
are required to house servers needed to train and run AI models.
0d74b2afc2134a2d9694ccd9a530a507
3. Servers and Networking: To build and operate data centers and fit companies to
use AI, various hardware and equipment will be required.
4. Utilities: Demand from data centers will require increased electricity.
5. Cloud Providers: Cloud companies are required to train, run, and maintain AI
models through their computing and data storage solutions.
6. Security: Companies may need to rely on software companies for endpoint security.
14 March 2024 10
Goldman Sachs US Equity Views
Exhibit 12: Phase 2 of the AI trade will likely focus on the broader AI infrastructure ecosystem
Average
correlation
Category Description Companies (ranked by market cap) with NVDA
Semiconductors
Fabless Designer The design, but not the manufacturing, of AVGO, AMD, QCOM, MRVL, 2454 (TW), MPWR, LSCC,
0.48
(ex-NVDA) semiconductor chips. CRDO
Foundry &
Integrated Device The manufacturing of semiconductor chips. 2330 (TW), INTC, GFS 0.27
Manufacturer (IDM)
Manufacturing Companies that provide equipment needed to ASML-NL, AMAT, LRCX, 8035 (JP), KLAC, TER, ONTO,
0.45
Equipment manufacture semiconductor chips. MKSI, AEIS, ACLS, FORM, KLIC, UCTT, VECO
To build and operate data centers and fit CSCO, ANET, APH, SMCI, GLW, VRT, KEYS, HPE, NTAP,
Servers and Networking companies to use AI, various hardware and JBL, PSTG, NVT, COHR, SNX, FN, LFUS, SANM, BDC, 0.32
equipment will be required. LITE, VIAV, PLUS
NEE, SO, DUK, CEG, SRE, AEP, D, EXC, PCG, PEG, XEL,
Demand from data centers will require increased
Utilities WEC, ETR, FE, VST, PPL, AEE, CMS, AGR, NRG, EVRG, -0.05
electricity.
AES, BEPC, PNW, OGE, IDA, POR, BKH
Cloud companies are required to train, run, and
Cloud Provider maintain AI models through their computing and MSFT, AMZN, GOOGL, ORCL 0.50
data storage solutions.
Universe based on Russell 3000 stocks with >$2 bn market cap and MSCI World stocks with >$50 bn market cap. ARM is a large US-listed semiconductor stock but is not in the Russell 3000. Stock
classifications based on a combination of company business descriptions, company website, GICS classificiations, and company earnings transcripts. Correlation with NVDA based on daily returns
during the past 6 months.
0d74b2afc2134a2d9694ccd9a530a507
There has been a wide distribution of returns among these groups, and among the
companies within each group. While AI alone is not driving stock performance in each
category, Security and Fabless Designers have performed best on average. The typical
Security stock is up 60% since September 2023, while the typical Fabless Designer is
up 47%. On the other hand, AI-exposed Utilities do not appear to have reflected much
optimism from potential demand increases (-2%).
14 March 2024 11
Goldman Sachs US Equity Views
150 %
SMCI
Distribution of 6-month returns +339%
125 % by AI category
100 %
NVDA +99%
Max
75 %
60%
47%
50 % 38%
34%
Median 26% 26%
25 % 17%
13% 12%
SPW +13%
-2%
0%
Min
(25)%
For the exclusive use of Goldman Sachs Clients
(50)%
Security Fabless Manufacturing Memory Design Servers & Cloud Data Center Foundry & Utilities
(N=4) Designer Equipment (N=4) (N=3) Networking Provider (Real Estate) Integrated Mfg (N=28)
(N=8) (N=14) (N=21) (N=4) (N=4) (N=3)
0d74b2afc2134a2d9694ccd9a530a507
14 March 2024 12
Goldman Sachs US Equity Views
Exhibit 14: Change in median stock forward EPS versus P/E during the past 6 months
40 %
More
35 % valuation
driven
Fabless More
30 %
Manufacturing Designer earnings
Equipment driven
25 %
(10)%
(10)% 0% 10 % 20 % 30 % 40 % 50 %
For the exclusive use of Goldman Sachs Clients
Within Phase 2, Foundry & IDMs have a relatively attractive setup of strong
expected EPS growth with modest valuations (Exhibit 14). We acknowledge that
many factors beyond AI affect growth expectations and valuation. Security stocks have
strong earnings expectations, but could be challenged by already elevated investor
expectations. The typical Security stock trades at 51x, well above the level implied by
FY3 EPS growth estimates. The potential benefits to Utilities appear largely unpriced by
analysts or investors. However, the sector is heavily regulated and is especially sensitive
to the macro backdrop, so structuring the trade on a relative basis (vs. other Utilities)
0d74b2afc2134a2d9694ccd9a530a507
would likely be key. Notably, NVDA has relatively low FY3 EPS growth expectations but
trades at 29x FY3 EPS, implying investors may expect earnings growth to be faster than
analysts expect today.
14 March 2024 13
Goldman Sachs US Equity Views
Exhibit 15: Growth vs. valuation for median stock in Phase 2 categories
50 x Security
Design
35 x
FY3 P/E
30 x Cloud
NVDA
Provider
25 x
Data Center Fabless
(Real Estate) Designer
20 x
Manufacturing
Equipment
15 x Servers & Foundry & IDMs
S&P 500 Networking
10 x Utilities
Memory
5x
0% 4% 8% 12 % 16 % 20 % 24 % 28 % 32 %
FY3 EPS growth
For the exclusive use of Goldman Sachs Clients
0d74b2afc2134a2d9694ccd9a530a507
14 March 2024 14
Goldman Sachs US Equity Views
The typical stock in the screen for Phase 3 stocks has returned 8% YTD and trades
at a forward P/E of 31x (Exhibit 16). The outperformance of these stocks, while driven
by many factors other than exclusively AI, suggests investors have begun to trade Phase
3 already.
0d74b2afc2134a2d9694ccd9a530a507
transcript analysis does not capture.
14 March 2024 15
Goldman Sachs US Equity Views
Exhibit 16: Select AI “enabled” companies with strong correlation to NVDA that discuss AI use cases during 4Q earnings calls
based on regression of daily returns against NVDA, equal-weight S&P 500, and nominal 10-year UST yield since September
Sensitivty
Mkt cap YTD Forward to NVDA
Ticker Name Industry ($ billion) return P/E (t-stat)
META Meta Platforms Inc Interactive Media & Services 1,290 40 % 21 x 5.7
MDB MongoDB, Inc. IT Services 27 (9) 99 5.3
INTU Intuit Inc. Software 182 5 32 5.1
NTNX Nutanix, Inc. Software 15 36 40 4.9
NOW ServiceNow, Inc. Software 155 10 46 4.7
ACN Accenture Plc IT Services 234 8 27 4.2
ACVA ACV Auctions, Inc. Commercial Services & Supplies 3 16 33 4.0
ADBE Adobe Inc. Software 253 (4) 27 3.8
QTWO Q2 Holdings, Inc. Software 3 16 26 3.7
NET Cloudflare Inc IT Services 33 15 118 3.7
UBER Uber Technologies, Inc. Ground Transportation 161 27 36 3.6
ADSK Autodesk, Inc. Software 55 6 28 3.6
ZS Zscaler, Inc. Software 30 (9) 53 3.4
MA Mastercard Inc. Financial Services 438 12 27 3.4
DT Dynatrace, Inc. Software 14 (15) 30 3.3
CRM Salesforce, Inc. Software 297 16 27 3.3
AAPL Apple Inc. Tech Hardware 2,668 (11) 23 3.2
For the exclusive use of Goldman Sachs Clients
0d74b2afc2134a2d9694ccd9a530a507
Source: FactSet, Goldman Sachs Global Investment Research
14 March 2024 16
Goldman Sachs US Equity Views
Phase 4: AI productivity
Eventually, the AI trade will focus on companies across a variety of industries that
can embrace the technology to improve their productivity. Our framework for
estimating the potential earnings boost from AI adoption via labor productivity combines
the share of a company’s wage bill exposed to AI automation with the labor cost share
of the company. Assuming either stable margins or stable revenues, we calculate the
implied earnings boost from AI automation. We previously estimated the boost for the
typical Russell 1000 stock would be 11% through a revenue channel or 26% through a
margin channel. At the industry group level, Software & Services and Commercial &
Professional Services have the largest potential earnings gains from AI adoption via
labor productivity. These three industries have a combination of a high share of their
wage bill exposed to AI automation and relatively high labor costs (see US Equity
Views).
45%
Exposure to automation by AI Software & Services
40% vs. labor costs as % of revenues
(Russell 1000 industry median)
35%
Labor costs as % of revenues
25%
Pharma & Biotech
HC Equip & Svcs
20% Transportation Banks
Capital Goods
Consumer Media & Ent
15% Services Financial Svcs
Russell 1000 Tech Hardware
Materials Autos Semis
10% Utilities
0d74b2afc2134a2d9694ccd9a530a507
Staples Retail HH & Personal Products
Disc. Retail Insurance
5%
Equity REITs
Energy
0%
24% 26% 28% 30% 32% 34% 36% 38% 40% 42%
Exposure to automation by AI
Consistent with the expected productivity gains, Software & Services and
Commercial & Professional Services account for 30% of productivity-related AI
mentions during 4Q earnings season. We only include companies where
managements discussed AI in the explicit context of efficiency, productivity, or cost. The
transcript analysis helps overlay potential gains from AI adoption with managements
likely to embrace the technology to harness those gains.
14 March 2024 17
Goldman Sachs US Equity Views
Exhibit 18: Breakdown of mentions of AI during 4Q earnings season Exhibit 19: Labor-intensive industries mentioned AI efficiency most
as of March 1; unique companies as a share of total mentions in the frequently
explicit context of productivity
Source: FactSet, Goldman Sachs Global Investment Research Source: Company filings, FactSet, Goldman Sachs Global Investment Research
For the exclusive use of Goldman Sachs Clients
0d74b2afc2134a2d9694ccd9a530a507
14 March 2024 18
Goldman Sachs US Equity Views
By leveraging generative AI combined with machine learning to take the capability of our people to an even higher level, Robinson is positioned
CHRW Industrials well to further reduce waste and drive structural cost changes that improve our operating leverage and help deliver on the long-term operating
income margin expectations.
...we anticipate a gradual improvement in non-GAAP operating margin through fiscal year 2024, reflecting ongoing efforts to optimize Amdocs'
cost structure and the cumulative benefits of our continual initiatives to improve operational excellence. This includes the adoption of
DOX Information Technology
automation, other sophisticated tools and disciplined resource management, added to which we expect the implementation of gen AI to drive
additional cost and efficiency improvements across our business.
And then finally, as you know, we took some actions at the end of last year around our disciplined operating cost efficiencies, and we expect to
ELV Health Care
see even greater benefits from those as we digitize and use AI in our investments.
We have significant opportunity to run more efficiently across the company, to eliminate redundant systems, to keep optimizing in the cloud, and
utilize the latest productivity capabilities from AI. In addition, we will keep leveraging our technology leadership to find opportunities for
EXPE Consumer Discretionary
decreasing costs while increasing customer experience...By building better technology and self-service tools, we have both improved our NPS
and created massive efficiencies, all while maintaining our best-in-class service, and generative AI will only accelerate this trend.
...our longer-term financial objective of obtaining double-digit operating margins. We believe the key contributors are increased scale,
KFRC Industrials productivity improvements, including through our back-office transformation program and advancements in AI technologies, driving a greater
mix of managed teams and solutions business, and further reducing our fixed costs such as real estate.
The new ERP is expected to provide leading-edge functionality, including AI capabilities, allowing us to automate and streamline our processes
MRC Industrials
and systems to improve reporting, forecasting, and controls. It will also reduce IT maintenance costs by approximately $2 million a year.
For the exclusive use of Goldman Sachs Clients
And importantly, as you know, we are adopting AI across the business, which we expect to save time, increase productivity and drive scalability
MRNA Health Care
in addition to cost savings. Our use of AI is increasing by the week.
MTCH Communication Services While AI brings with it cost efficiencies and a potent optimization tool, we view it as far more than just that.
And we're already seeing very interesting trends in the ability of AI to reduce costs related to technology spend, to the creation of code, to the
NWSA Communication Services cultivation of code. And so not only are we going to be pursuing our conventional costs, but we're looking ahead and trying to make the most of
new developments.
The combination of process reengineering, automation and AI is still in progress, but we have already seen positive savings and have a target of
PANW Information Technology
automating 90% of the more than 300,000 manual interventions.
We're also using AI tools to optimize fill rates and for dynamic routing sourcing optimization, $200 million to $300 million of savings opportunity
PG Consumer Staples
across these areas.
We're also in the process of launching several cost savings initiatives. These include automation and AI programs, such as the expanded use of
SPTN Consumer Staples Tally, our in-stock robot, which will appear in 75 stores this year. We're also implementing an automated workforce planning tool and inventory
validation warehouse drones.
0d74b2afc2134a2d9694ccd9a530a507
...we're very excited about generative AI. There are big opportunities for us to improve the customer and member experience, improve associate
WMT Consumer Staples
experiences and productivity and to help take costs out of the business, and we're moving.
Our Long-term AI basket (GSTHLTAI) offers investors a list of stocks with the
largest potential EPS upside from AI adoption via labor productivity. We create the
basket based on the average of the two approaches: 1) revenue boost and stable
margins, 2) margin boost and stable revenues. See US Equity Views for details. We
expect this phase of AI adoption will occur gradually over the next few years. 12
companies in our 50-stock Long-term AI basket mentioned potential productivity gains
from AI adoption during 4Q earnings season: AMZN, CPNG, CTSH, DXC, HRB, HUBS,
NWSA, NYT, PINS, RCM, RHI, WMT. See Exhibit 21 for the constituents of GSTHLTAI.
Since early 2023, GSTHLTAI has outperformed by less than the other groups of AI
beneficiaries, suggesting much of the broader productivity gains have yet to be
priced in. Commentary from 4Q earnings season left the question of timing largely
unresolved: Some companies highlighted an impact of AI on their business already,
14 March 2024 19
Goldman Sachs US Equity Views
FAF First American Financial Corp. 6 (12) 13 43 16 38 JLL Jones Lang LaSalle Incorporated $9 (2)% 15x 35 % 30 % 120 %
WTW Willis Towers Watson 28 14 16 39 34 36
MMC Marsh & McLennan Companies, Inc. 102 10 24 39 28 30 Utilities
FNF Fidelity National Financial, Inc. 14 1 10 42 15 30 HE Hawaiian Electric Industries, Inc. $1 (21)% 5x 33 % 12 % 26 %
VOYA Voya Financial, Inc. 7 (2) 8 39 18 30
List median $11 2% 22x 36 % 34 % 72 %
Health Care Russell 1000 median 14 4 19 33 14 19
THC Tenet Healthcare Corp. $10 33 % 16x 33 % 31 % 135 %
DVA DaVita Inc. 12 32 14 34 41 105
UHS Universal Health Services, Inc. 12 15 13 33 35 91
IQV IQVIA Holdings Inc 46 10 22 38 61 77
RCM R1 RCM Inc 6 32 51 38 23 77
EHC Encompass Health Corp. 7 14 18 34 34 68
ILMN Illumina, Inc. 20 (5) 108 34 33 54
0d74b2afc2134a2d9694ccd9a530a507
14 March 2024 20
Goldman Sachs US Equity Views
Appendix
Assuming a finite horizon period and rearranging this model, their approach
simultaneously solves for the implied rate of return on equity (“cost of equity”) and the
perpetual growth rate in residual income by using a cross-sectional regression of
company data. We exclude companies with negative book value and exclude companies
with extreme observations.
Exhibit 22: Framework for solving for implied cost of equity and growth rate
see “Using forecasts of earnings to simultaneously estimate growth and the rate of return on equity investment”
For the exclusive use of Goldman Sachs Clients
Easton et al (2002)
∞ E0 [ Xt - r * Bt-1 ]
P0 = B0 + Σ t
1 (1+r)
Residual income
where:
P = price X = earnings per share
B = book value per share r = expected rate of return on equity
E = expectations at time 0
Source: Goldman Sachs Global Investment Research
0d74b2afc2134a2d9694ccd9a530a507
14 March 2024 21
Goldman Sachs US Equity Views
Phase 2 constituents
0d74b2afc2134a2d9694ccd9a530a507
Littelfuse LFUS Servers and Networking
Sanmina Corporation SANM Servers and Networking
Belden Inc. BDC Servers and Networking
Lumentum Holdings LITE Servers and Networking
Viavi Solutions Inc VIAV Servers and Networking
ePlus inc. PLUS Servers and Networking
NextEra Energy NEE Utilities
Southern Company SO Utilities
Duke Energy Corporation DUK Utilities
Constellation Energy Corporation CEG Utilities
Sempra SRE Utilities
American Electric Power Company AEP Utilities
Dominion Energy Inc D Utilities
Exelon Corporation EXC Utilities
PG&E Corporation PCG Utilities
Public Service Enterprise Group Inc PEG Utilities
Xcel Energy Inc. XEL Utilities
WEC Energy Group Inc WEC Utilities
Entergy Corporation ETR Utilities
FirstEnergy Corp. FE Utilities
Vistra Corp. VST Utilities
PPL Corporation PPL Utilities
Ameren Corporation AEE Utilities
CMS Energy Corporation CMS Utilities
Avangrid AGR Utilities
NRG Energy NRG Utilities
Evergy EVRG Utilities
AES Corporation AES Utilities
Brookfield Renewable Corp. BEPC Utilities
Pinnacle West Capital Corporation PNW Utilities
OGE Energy Corp. OGE Utilities
IDACORP IDA Utilities
Portland General Electric Company POR Utilities
Black Hills Corporation BKH Utilities
14 March 2024 22
Goldman Sachs US Equity Views
Disclosure Appendix
Reg AC
We, Ryan Hammond, Daniel Chavez, David J. Kostin, Ben Snider, Cormac Conners and Jenny Ma, hereby certify that all of the views expressed in this
report accurately reflect our personal views, which have not been influenced by considerations of the firm’s business or client relationships.
Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs’ Global Investment Research division.
Disclosures
Basket Disclosure
Marquee disclosure: Marquee is a product of Goldman Sachs Global Banking & Markets. Any Marquee content linked in this report is not necessarily
representative of GS Research views. If you need access to Marquee, please contact your GS salesperson or email the Marquee team at
[email protected].
Other disclosure
The spouse of a GIR analyst, who is not on the covered company’s coverage team but is a member of the same industry business unit, is the Chief
Executive Officer and shareholder of HubSpot.
Regulatory disclosures
Disclosures required by United States laws and regulations
See company-specific regulatory disclosures above for any of the following disclosures required as to companies referred to in this report: manager or
co-manager in a pending transaction; 1% or other ownership; compensation for certain services; types of client relationships; managed/co-managed
public offerings in prior periods; directorships; for equity securities, market making and/or specialist role. Goldman Sachs trades or may trade as a
principal in debt securities (or in related derivatives) of issuers discussed in this report.
For the exclusive use of Goldman Sachs Clients
The following are additional required disclosures: Ownership and material conflicts of interest: Goldman Sachs policy prohibits its analysts,
professionals reporting to analysts and members of their households from owning securities of any company in the analyst’s area of coverage.
Analyst compensation: Analysts are paid in part based on the profitability of Goldman Sachs, which includes investment banking revenues. Analyst
as officer or director: Goldman Sachs policy generally prohibits its analysts, persons reporting to analysts or members of their households from
serving as an officer, director or advisor of any company in the analyst’s area of coverage. Non-U.S. Analysts: Non-U.S. analysts may not be
associated persons of Goldman Sachs & Co. LLC and therefore may not be subject to FINRA Rule 2241 or FINRA Rule 2242 restrictions on
communications with subject company, public appearances and trading securities held by the analysts.
Additional disclosures required under the laws and regulations of jurisdictions other than the United States
The following disclosures are those required by the jurisdiction indicated, except to the extent already made above pursuant to United States laws and
regulations. Australia: Goldman Sachs Australia Pty Ltd and its affiliates are not authorised deposit-taking institutions (as that term is defined in the
Banking Act 1959 (Cth)) in Australia and do not provide banking services, nor carry on a banking business, in Australia. This research, and any access to
it, is intended only for “wholesale clients” within the meaning of the Australian Corporations Act, unless otherwise agreed by Goldman Sachs. In
producing research reports, members of Global Investment Research of Goldman Sachs Australia may attend site visits and other meetings hosted by
the companies and other entities which are the subject of its research reports. In some instances the costs of such site visits or meetings may be met
in part or in whole by the issuers concerned if Goldman Sachs Australia considers it is appropriate and reasonable in the specific circumstances relating
to the site visit or meeting. To the extent that the contents of this document contains any financial product advice, it is general advice only and has
been prepared by Goldman Sachs without taking into account a client’s objectives, financial situation or needs. A client should, before acting on any
such advice, consider the appropriateness of the advice having regard to the client’s own objectives, financial situation and needs. A copy of certain
0d74b2afc2134a2d9694ccd9a530a507
Goldman Sachs Australia and New Zealand disclosure of interests and a copy of Goldman Sachs’ Australian Sell-Side Research Independence Policy
Statement are available at: https://www.goldmansachs.com/disclosures/australia-new-zealand/index.html. Brazil: Disclosure information in relation to
CVM Resolution n. 20 is available at https://www.gs.com/worldwide/brazil/area/gir/index.html. Where applicable, the Brazil-registered analyst primarily
responsible for the content of this research report, as defined in Article 20 of CVM Resolution n. 20, is the first author named at the beginning of this
report, unless indicated otherwise at the end of the text. Canada: This information is being provided to you for information purposes only and is not,
and under no circumstances should be construed as, an advertisement, offering or solicitation by Goldman Sachs & Co. LLC for purchasers of
securities in Canada to trade in any Canadian security. Goldman Sachs & Co. LLC is not registered as a dealer in any jurisdiction in Canada under
applicable Canadian securities laws and generally is not permitted to trade in Canadian securities and may be prohibited from selling certain securities
and products in certain jurisdictions in Canada. If you wish to trade in any Canadian securities or other products in Canada please contact Goldman
Sachs Canada Inc., an affiliate of The Goldman Sachs Group Inc., or another registered Canadian dealer. Hong Kong: Further information on the
securities of covered companies referred to in this research may be obtained on request from Goldman Sachs (Asia) L.L.C. India: Further information
on the subject company or companies referred to in this research may be obtained from Goldman Sachs (India) Securities Private Limited, Research
Analyst - SEBI Registration Number INH000001493, 951-A, Rational House, Appasaheb Marathe Marg, Prabhadevi, Mumbai 400 025, India, Corporate
Identity Number U74140MH2006FTC160634, Phone +91 22 6616 9000, Fax +91 22 6616 9001. Goldman Sachs may beneficially own 1% or more of
the securities (as such term is defined in clause 2 (h) the Indian Securities Contracts (Regulation) Act, 1956) of the subject company or companies
referred to in this research report. Investment in securities market are subject to market risks. Read all the related documents carefully before
investing. Registration granted by SEBI and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of
returns to investors. Goldman Sachs (India) Securities Private Limited Investor Grievance E-mail: [email protected]. Compliance Officer: Anil
Rajput |Tel: + 91 22 6616 9000 | Email: [email protected]. Japan: See below. Korea: This research, and any access to it, is intended only for
“professional investors” within the meaning of the Financial Services and Capital Markets Act, unless otherwise agreed by Goldman Sachs. Further
information on the subject company or companies referred to in this research may be obtained from Goldman Sachs (Asia) L.L.C., Seoul Branch. New
Zealand: Goldman Sachs New Zealand Limited and its affiliates are neither “registered banks” nor “deposit takers” (as defined in the Reserve Bank of
New Zealand Act 1989) in New Zealand. This research, and any access to it, is intended for “wholesale clients” (as defined in the Financial Advisers Act
2008) unless otherwise agreed by Goldman Sachs. A copy of certain Goldman Sachs Australia and New Zealand disclosure of interests is available at:
https://www.goldmansachs.com/disclosures/australia-new-zealand/index.html. Russia: Research reports distributed in the Russian Federation are not
advertising as defined in the Russian legislation, but are information and analysis not having product promotion as their main purpose and do not
provide appraisal within the meaning of the Russian legislation on appraisal activity. Research reports do not constitute a personalized investment
recommendation as defined in Russian laws and regulations, are not addressed to a specific client, and are prepared without analyzing the financial
circumstances, investment profiles or risk profiles of clients. Goldman Sachs assumes no responsibility for any investment decisions that may be taken
by a client or any other person based on this research report. Singapore: Goldman Sachs (Singapore) Pte. (Company Number: 198602165W), which is
14 March 2024 23
Goldman Sachs US Equity Views
regulated by the Monetary Authority of Singapore, accepts legal responsibility for this research, and should be contacted with respect to any matters
arising from, or in connection with, this research. Taiwan: This material is for reference only and must not be reprinted without permission. Investors
should carefully consider their own investment risk. Investment results are the responsibility of the individual investor. United Kingdom: Persons who
would be categorized as retail clients in the United Kingdom, as such term is defined in the rules of the Financial Conduct Authority, should read this
research in conjunction with prior Goldman Sachs research on the covered companies referred to herein and should refer to the risk warnings that have
been sent to them by Goldman Sachs International. A copy of these risks warnings, and a glossary of certain financial terms used in this report, are
available from Goldman Sachs International on request.
European Union and United Kingdom: Disclosure information in relation to Article 6 (2) of the European Commission Delegated Regulation (EU)
(2016/958) supplementing Regulation (EU) No 596/2014 of the European Parliament and of the Council (including as that Delegated Regulation is
implemented into United Kingdom domestic law and regulation following the United Kingdom’s departure from the European Union and the European
Economic Area) with regard to regulatory technical standards for the technical arrangements for objective presentation of investment
recommendations or other information recommending or suggesting an investment strategy and for disclosure of particular interests or indications of
conflicts of interest is available at https://www.gs.com/disclosures/europeanpolicy.html which states the European Policy for Managing Conflicts of
Interest in Connection with Investment Research.
Japan: Goldman Sachs Japan Co., Ltd. is a Financial Instrument Dealer registered with the Kanto Financial Bureau under registration number Kinsho
69, and a member of Japan Securities Dealers Association, Financial Futures Association of Japan Type II Financial Instruments Firms Association, The
Investment Trusts Association, Japan, and Japan Investment Advisers Association. Sales and purchase of equities are subject to commission
pre-determined with clients plus consumption tax. See company-specific disclosures as to any applicable disclosures required by Japanese stock
exchanges, the Japanese Securities Dealers Association or the Japanese Securities Finance Company.
Goldman Sachs Japan Co., Ltd.; in the Republic of Korea by Goldman Sachs (Asia) L.L.C., Seoul Branch; in New Zealand by Goldman Sachs New
Zealand Limited; in Russia by OOO Goldman Sachs; in Singapore by Goldman Sachs (Singapore) Pte. (Company Number: 198602165W); and in the
United States of America by Goldman Sachs & Co. LLC. Goldman Sachs International has approved this research in connection with its distribution in
the United Kingdom.
Goldman Sachs International (“GSI”), authorised by the Prudential Regulation Authority (“PRA”) and regulated by the Financial Conduct Authority
(“FCA”) and the PRA, has approved this research in connection with its distribution in the United Kingdom.
European Economic Area: GSI, authorised by the PRA and regulated by the FCA and the PRA, disseminates research in the following jurisdictions
within the European Economic Area: the Grand Duchy of Luxembourg, Italy, the Kingdom of Belgium, the Kingdom of Denmark, the Kingdom of
Norway, the Republic of Finland and the Republic of Ireland; GSI - Succursale de Paris (Paris branch) which is authorised by the French Autorité de
contrôle prudentiel et de resolution (“ACPR”) and regulated by the Autorité de contrôle prudentiel et de resolution and the Autorité des marches
financiers (“AMF”) disseminates research in France; GSI - Sucursal en España (Madrid branch) authorized in Spain by the Comisión Nacional del
Mercado de Valores disseminates research in the Kingdom of Spain; GSI - Sweden Bankfilial (Stockholm branch) is authorized by the SFSA as a “third
country branch” in accordance with Chapter 4, Section 4 of the Swedish Securities and Market Act (Sw. lag (2007:528) om värdepappersmarknaden)
disseminates research in the Kingdom of Sweden; Goldman Sachs Bank Europe SE (“GSBE”) is a credit institution incorporated in Germany and, within
the Single Supervisory Mechanism, subject to direct prudential supervision by the European Central Bank and in other respects supervised by German
Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin) and Deutsche Bundesbank and disseminates research
in the Federal Republic of Germany and those jurisdictions within the European Economic Area where GSI is not authorised to disseminate research
and additionally, GSBE, Copenhagen Branch filial af GSBE, Tyskland, supervised by the Danish Financial Authority disseminates research in the Kingdom
of Denmark; GSBE - Sucursal en España (Madrid branch) subject (to a limited extent) to local supervision by the Bank of Spain disseminates research in
0d74b2afc2134a2d9694ccd9a530a507
the Kingdom of Spain; GSBE - Succursale Italia (Milan branch) to the relevant applicable extent, subject to local supervision by the Bank of Italy (Banca
d’Italia) and the Italian Companies and Exchange Commission (Commissione Nazionale per le Società e la Borsa “Consob”) disseminates research in
Italy; GSBE - Succursale de Paris (Paris branch), supervised by the AMF and by the ACPR disseminates research in France; and GSBE - Sweden
Bankfilial (Stockholm branch), to a limited extent, subject to local supervision by the Swedish Financial Supervisory Authority (Finansinpektionen)
disseminates research in the Kingdom of Sweden.
General disclosures
This research is for our clients only. Other than disclosures relating to Goldman Sachs, this research is based on current public information that we
consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. The information, opinions, estimates and
forecasts contained herein are as of the date hereof and are subject to change without prior notification. We seek to update our research as
appropriate, but various regulations may prevent us from doing so. Other than certain industry reports published on a periodic basis, the large majority
of reports are published at irregular intervals as appropriate in the analyst’s judgment.
Goldman Sachs conducts a global full-service, integrated investment banking, investment management, and brokerage business. We have investment
banking and other business relationships with a substantial percentage of the companies covered by Global Investment Research. Goldman Sachs &
Co. LLC, the United States broker dealer, is a member of SIPC (https://www.sipc.org).
Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and principal
trading desks that reflect opinions that are contrary to the opinions expressed in this research. Our asset management area, principal trading desks and
investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this research.
We and our affiliates, officers, directors, and employees will from time to time have long or short positions in, act as principal in, and buy or sell, the
securities or derivatives, if any, referred to in this research, unless otherwise prohibited by regulation or Goldman Sachs policy.
The views attributed to third party presenters at Goldman Sachs arranged conferences, including individuals from other parts of Goldman Sachs, do not
necessarily reflect those of Global Investment Research and are not an official view of Goldman Sachs.
Any third party referenced herein, including any salespeople, traders and other professionals or members of their household, may have positions in the
products mentioned that are inconsistent with the views expressed by analysts named in this report.
This research is focused on investment themes across markets, industries and sectors. It does not attempt to distinguish between the prospects or
14 March 2024 24
Goldman Sachs US Equity Views
performance of, or provide analysis of, individual companies within any industry or sector we describe.
Any trading recommendation in this research relating to an equity or credit security or securities within an industry or sector is reflective of the
investment theme being discussed and is not a recommendation of any such security in isolation.
This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be
illegal. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of
individual clients. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if
appropriate, seek professional advice, including tax advice. The price and value of investments referred to in this research and the income from them
may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur.
Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments.
Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors.
Investors should review current options and futures disclosure documents which are available from Goldman Sachs sales representatives or at
https://www.theocc.com/about/publications/character-risks.jsp and
https://www.fiadocumentation.org/fia/regulatory-disclosures_1/fia-uniform-futures-and-options-on-futures-risk-disclosures-booklet-pdf-version-2018.
Transaction costs may be significant in option strategies calling for multiple purchase and sales of options such as spreads. Supporting documentation
will be supplied upon request.
Differing Levels of Service provided by Global Investment Research: The level and types of services provided to you by Goldman Sachs Global
Investment Research may vary as compared to that provided to internal and other external clients of GS, depending on various factors including your
individual preferences as to the frequency and manner of receiving communication, your risk profile and investment focus and perspective (e.g.,
marketwide, sector specific, long term, short term), the size and scope of your overall client relationship with GS, and legal and regulatory constraints.
As an example, certain clients may request to receive notifications when research on specific securities is published, and certain clients may request
that specific data underlying analysts’ fundamental analysis available on our internal client websites be delivered to them electronically through data
feeds or otherwise. No change to an analyst’s fundamental research views (e.g., ratings, price targets, or material changes to earnings estimates for
equity securities), will be communicated to any client prior to inclusion of such information in a research report broadly disseminated through electronic
publication to our internal client websites or through other means, as necessary, to all clients who are entitled to receive such reports.
All research reports are disseminated and available to all clients simultaneously through electronic publication to our internal client websites. Not all
research content is redistributed to our clients or available to third-party aggregators, nor is Goldman Sachs responsible for the redistribution of our
For the exclusive use of Goldman Sachs Clients
research by third party aggregators. For research, models or other data related to one or more securities, markets or asset classes (including related
services) that may be available to you, please contact your GS representative or go to https://research.gs.com.
Disclosure information is also available at https://www.gs.com/research/hedge.html or from Research Compliance, 200 West Street, New York, NY
10282.
© 2024 Goldman Sachs.
No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written
consent of The Goldman Sachs Group, Inc.
0d74b2afc2134a2d9694ccd9a530a507
14 March 2024 25