AI Boom May Be Priced in, Says Goldman Sachs—Is a Worse Pullback on the Way?

GS -1.57%

Quick Read

• Goldman Sachs (GS) noted that most of the AI boom may already be priced into the stock market.

• The S&P 500 slipped more than 5% from its all-time high amid AI correction fears.

• Fourth quarter earnings may benefit from a lower bar if selling continues into the next reporting season.

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Tune into your favorite financial television channel these days, and you're bound to get at least a handful of reasons to sell amid the recent pick-up in volatility. With Goldman Sachs (NYSE:GS) recently noting the possibility that most of the AI boom may already be priced into the stock market, there seems to be serious concern for the magnitude of returns moving forward, especially if there's more AI froth to take off the top before the year comes to a close.

Undoubtedly, there seems to be a lot of fear out there, and while an AI bubble burst scenario seems like a given after the S&P 500 slipped more than 5% from its all-time high, I would encourage investors not to make too much of the negative commentary and to instead consider where they stand when it comes to the long-term game plan.

At the end of the day, you just had to know that an AI correction would happen at some point. And while this might not be the "big one" that sees the bubble pop in spectacular fashion, investors should stay the course, regardless of what anyone thinks markets are up for over the near term.

It's impossible to know how markets will fare in the short term.

At the end of the day, it's impossible to tell what stocks will do next week or next month. Perhaps the AI pullback winds down and the Nasdaq 100 leads the rebound by over 3% soon after? Or perhaps more pain could be in the cards, as the Santa Claus rally gets shot down? Either way, long-term investors shouldn't make too much of the near-term moves and should be on the lookout for stocks that have been overly punished.

There's some high-quality merchandise that's being ditched by a wide range of investors, many of whom are being sold off for no good reason other than fear of more pain and perhaps some doubt about whether the market's more speculative assets can recover swiftly. With crypto markets once again swinging lower at the first signs of broad market volatility, perhaps long-term thinkers should rethink the types of alternative assets they choose to stash in their portfolio and whether their prior assumptions (like crypto being a digital version of gold) have gone bust.

Given the probability that some of the best bounce-back days aren't too far behind the worst days, I think you'd have to be incredibly talented to time the market right now in a way that'd make you money. Most folks can't do it and would probably risk losing money or missing out on recovery gains by attempting to make significant moves when volatility is heightened and sentiment could shift from hyped to horrified in just a few sessions!

Is the AI boom already priced in? What does that mean for investors?

As for Goldman's AI comments, I do think it's easy to conclude that there's more pain in store for the AI trade. At the end of the day, significant capital expenditures will be needed for a shot at big profits later on. And if you don't have the patience to wait things out and let the big tech companies do their thing, perhaps it's better to stick with a low-tech name that can hold up should the tech waters get choppier.

With the Magnificent Seven each reporting solid earnings for the third-quarter season, it may come off as bizarre to see the names retreating anyway. Undoubtedly, the post-earnings moves suggest the strong numbers were already priced in.

And it does seem like there's already a lot of "AI boom" baked in as well. The big question moving forward is how ROI will stack up against current expectations after the latest AI sell-off is over. I think the next quarterly earnings season (fourth quarter) is likely to be decent again, but if the selling continues, the bar might be lower, and we might actually see good numbers (and upped guidance) move the needle on the reporting stock again.

For now, it's apparent that Goldman is right about a lot of the AI boom being priced in. Moving forward, I think it's more a matter of "how long" it'll take for the AI-driven fundamental drivers to really kick in and spark profound upside surprises. Either way, I view the AI boom as mostly priced in over the short term, but perhaps not over the longer term.

The bottom line

The AI boom seems more like a multi-year secular trend that will see corrections along the way. And it seems like we're in another one of these road bumps. The real opportunity for investors amid the latest tech-driven market descent, I think, lies in the ability to differentiate between the big AI winners (those that will get the ROIs and sooner rather than later) and the losers (fair-to-poor ROIs or taking longer to drive the fundamentals).

Should this tech wreck worsen, I think the case for stock-picking, at least in my opinion, will strengthen, as some AI-powered firms pole-vault over expectations while others stumble along the way.

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