Apart from NVIDIA and AMD, is the valuation of AI stocks in the US stock market still rational? Long-term opportunities are here!

Although slightly suppressed in the past month, the US stock market remains strong this year, thanks in large part to the contribution of the seven giants - Nvidia, Apple, Microsoft, Meta, Amazon, Tesla, and Google - in the technology sector, which has exceeded expectations.

Analysts Liu Gang and Wu Wei from CICC further pointed out that "this year, technology stocks have benefited from the recovery after the exhaustion of penetration rate, the performance recovery due to self-funding cuts or the bottoming out of electronic/semiconductor expectations, as well as the valuation recovery brought about by the decline in long-term interest rates (10-year US Treasury bonds) in the first half of the year."

"In addition, the long-term opportunities brought by AI have received further attention. The market's valuation of AI-related targets, except for targets with significant AI revenue release such as Nvidia and AMD, remains rational."

Large-cap stocks benefiting from AI, such as Microsoft, Google, and Meta, have not seen a significant increase in valuation compared to the average since 2018. The increase in valuation of AI software stocks relative to the S&P software industry valuation is also relatively small. The benefits of AI are mainly reflected in revenue and revenue expectations.

According to Goldman Sachs, "AI-driven profit growth may occur in the next few years, but it is likely to be reflected more quickly in stock valuations. However, the ultimate impact on stock prices will depend on companies' ability to leverage AI to improve profitability."

Goldman Sachs has constructed an industry-neutral long-term basket of AI-beneficiary stocks in the Russell 1000 Index, identifying companies with the greatest potential for long-term earnings per share (EPS) growth due to the impact of AI on labor productivity.

According to Goldman Sachs' forecast, the median EPS of stocks in the basket may be 72% higher than the benchmark (the median EPS of Russell 1000 stocks is 19%).

Goldman Sachs estimates the potential growth of productivity-related EPS resulting from revenue or profit increases by combining the estimated share of wage expenses and labor costs to revenue ratio at the company level due to AI automation.

While the improvement in profit margins may not be permanent, investors may price in this possibility.

Since the beginning of 2023, when generative AI became a major investment theme, the performance of this basket of stocks has only outperformed the equally weighted S&P 500 Index by 6 percentage points, far below short-term beneficiaries, indicating that most of the potential productivity gains have not yet been priced in.

This also means that AI stocks still have room for growth in the future.