What’s after Nvidia in the AI rally?

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This chart from Goldman Sachs sure is depressing interesting:

While “software and services” workers are doing pretty well, it looks like that could change, says GS. They’re not all AI programmers, after all. Media & entertainment workers aren’t earning much compared to industry revenues, but executives still seem quite eager to capture “AI efficiency”.

Media-industry angst aside, this chart is part of a broader look at the “next phases of the AI trade” published late Thursday by GS.

The bank highlights stocks and sectors they think could benefit after AI rally poster child Nvidia, which somehow trades at about the same multiple to earnings as it did 12 months ago after rallying 265 per cent, according to FactSet.

For the rally’s next stage (they call it “infrastructure” or “Phase 2”) the bank predicts it’ll be standard tech-boom beneficiaries: Cyber security stocks, hardware makers and designers, cloud providers, etc.

One of these sectors has been less frothy, however — the bank says utilities companies should also benefit from the jump in electricity demand expected from AI (and presumably some regulatory support for raising rates). The Utilities Select Sector SPDR Fund is down 4.4 per cent over the past year.

Identifying Phase 3 is a little trickier. This is because it involves coming up with companies and sectors that could benefit from AI, but through less direct routes than simply getting paid for AI-related stuff, like power or hardware design or chips.

GS did this by screening for companies/stocks that 1) discuss AI a lot in their corporate communications and point to a specific or obvious way to use it; and 2) trade with a relatively high correlation to Nvidia.

The latter choice is pretty funny because it sort of rules out the idea that there are clear AI plays that aren’t already at least a little priced in. Nevertheless, the bank ends up with an array of “AI enabled” software, tech and services companies like Meta, Accenture, Salesforce, Uber, Adobe, etc.

And finally there’s Phase 4. This includes the sectors and companies that want to improve their productivity with AI but haven’t gotten as far implementing those plans:

We previously estimated the boost for the typical Russell 1000 stock would be 11% through a revenue channel or 26% through a margin channel . . . 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.

That includes the sectors featured in the chart at the top of this story. Other possibilities include the sectors situated closer to the top and right side of the chart below:

Banks aren’t exempt from job automation either, as anyone who used to work on a trading floor could tell you.

Further reading:
— ‘Sell Nvidia’
— Nvidia is nuts, when’s the crash?