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Wall Street's new consensus: AI will drive the stock market higher

In a Tuesday note, the global markets team at Capital Economics moved up its year-end forecast for the S&P 500 from 4,500 to 5,500 in 2024 and from 5,000 to 6,500 in 2025.

A key driver behind that surge higher will be artificial intelligence, it said.

"We think investors' enthusiasm about AI has room to grow even further over the next couple of years," Capital Economics senior markets economist Thomas Mathews wrote. "New technologies – even those that have turned out to be genuinely transformative – have often manifested in the inflation of 'bubbles' in stock prices in the past. We are increasingly of the view that we're seeing something similar now or, at the very least, that we are in a period in which enthusiasm about AI technology could grow further and provide a strong tailwind for equity indices more broadly. "

Mathews is the latest strategist to get behind what's become a growing consensus among firms discussing the outlook for US equities: AI will drive stocks higher.

Bank of America and RBC both referenced AI when boosting their 2023 year-end price targets for the S&P 500, while Goldman Sachs called the S&P 500 undervalued due to AI.

"We assume that widespread AI adoption occurs in 10 years and lifts trend real GDP growth by 1.1 percentage point for 10 years. In this scenario, earnings per share in 20 years would be 11% greater than our current assumption and the S&P 500 fair value would be 9% higher than today, holding all else equal," Goldman Sachs strategist Ryan Hammond wrote in a note on June 6.

A number of strategists are predicting AI will drive market gains. (AP Photo/Richard Drew)
A number of strategists are predicting AI will drive market gains. (AP Photo/Richard Drew)

The mentions of AI in Wall Street commentary have followed a first-quarter earnings season littered with the word.

There are companies that have laid out clear revenue streams like Nvidia (NVDA), whose current quarter expectations for $11 billion in revenue topped Street estimates for $7.2 billion. There are others with clear strategies and use cases, like the search wars between Microsoft (MSFT) and Google (GOOGL). And there are even some consumer businesses like Best Buy (BBY) that plan to use AI to help summarize customer calls.

"This new capability allows our agents to both fully focus on the customer during the call and reduces time between calls, lowering overall costs and improving agent satisfaction," Best Buy CEO Corie Barry said on the company's latest earnings call.

What started first quarter earnings season feeling like a metaverse-style moment, where every company has to make a mention of a hot new trend, has turned into what Wall Street views as a real contributor to future earnings.

"The AI hype surrounding the Tech sector is real and likely to propel future growth for many stocks within the space," BMO Capital Markets chief investment strategist Brian Belski wrote in a note that included an S&P 500 price target bump on June 5. "So, despite an extremely strong (year-to-date) sector performance, we believe the momentum, even if it slows a bit, is likely to persist for the foreseeable future."

The comparison has brought about many comparisons to the dot-com bubble. This is to mean that some AI companies, like those of the dot-com era, will be major winners, while many others will fall by the wayside in what proves to be a frothy market.

But as the hype train AI chugs along, the growing consensus is proving to be a differentiator in this bubble. There isn't a crypto-like debate happening over whether there will ever be a use case.

With AI as a consensus growth driver, the question centers around whether it's 1995 and the bubble has just begun or it's 1999 and only the best-positioned AI companies will survive when stock valuations come falling back down.

"1999’s 'Dot.com' rally is the example of needing to see the 'Forest Through the Trees,' where the longer term trader/investor does not want to get the 'Tap on the Shoulder' from the Risk Manager, concerned with day-to-day (profits and losses)," Julian Emanuel, who leads Evercore ISI's equity strategy team wrote in a note to clients on Tuesday.

Josh is a reporter for Yahoo Finance.

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