Matthew Weir of Goldman Sachs explains that investors are shifting focus from AI and tech spending levels to questioning whether these investments will deliver meaningful earnings growth, with Goldman forecasting moderate S&P 500 returns due to high valuations. He remains optimistic about the long-term benefits of AI and expects markets to recover from geopolitical shocks, viewing current concerns in the software sector as evolutionary rather than existential.
Matthew Weir from Goldman Sachs discusses how investor focus is shifting from simply tracking capital expenditures (CapEx) in the tech and AI sectors to questioning the actual return on investment (ROI) from these large outlays. While there has been significant investment in AI and technology, Weir notes that, on a national scale, capital formation as a share of GDP remains at similar levels to 2018, suggesting the investment is not excessive or imbalanced. Investors are now more concerned about whether these investments will translate into meaningful earnings growth.
Weir emphasizes that the primary driver of equity market returns is corporate earnings. He points out that, historically, 80-90% of S&P 500 returns come from earnings growth. For 2024, Goldman Sachs expects S&P 500 earnings to grow by about 10%, supported by a forecast of 2.4% real GDP growth in the U.S., which is above the long-term trend. However, he cautions that not all of this earnings growth will be reflected in total returns, as current market valuations are elevated and may come down, leading to an estimated total return of around 7% for the S&P 500.
Addressing concerns about the software sector, Weir acknowledges that there is anxiety among investors, but he believes the situation is evolutionary rather than existential. Drawing parallels to past episodes of market pessimism—such as during the global financial crisis or the COVID-19 pandemic—he argues that fears are often overblown and that competitive risks do not equate to the sector’s demise. He expects software companies to adapt and remain competitive over time.
The conversation also touches on geopolitical risks, particularly the ongoing conflict in the Middle East involving Iran. Weir explains that while such events cause short-term market volatility—typically resulting in an initial sell-off in equities, a stronger dollar, higher oil prices, and rising bond prices—historical patterns show that markets usually recover within eight weeks. In most cases, U.S. equities end up higher than pre-crisis levels, so Goldman Sachs has not changed its investment outlook based on current geopolitical tensions.
Finally, Weir discusses the long-term impact of AI on the labor market and inflation. While AI is expected to displace about a million jobs per year, he points out that the U.S. economy regularly creates more new jobs than it loses, thanks to ongoing innovation and economic dynamism. Investments in AI, such as data center construction and rising asset prices, are boosting productivity and net worth, leading to increased consumption. Overall, Weir remains bullish on the net impact of AI, viewing it as a positive force for growth despite short-term disruptions.