Artificial intelligence has propelled the stock market to all-time highs, but Goldman Sachs (NYSE:GS) recently warned that once AI spending slows down, the stock market can tank by 20%. A research note from Goldman Sachs Analyst Ryan Hammond cited the danger of hyperscalers inevitably cutting back on AI expenditures, according to Fortune.
“A reversion of long-term growth estimates back to early 2023 levels would imply 15% to 20% downside to the current valuation multiple of the S&P 500,” Hammond reportedly wrote in his research note.
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Right now, AI spending is full steam ahead, but Hammond wrote that a few analysts are assuming that a sharp deceleration will take place in Q4 2025 and 2026.
Tech giants haven’t gotten the memo. Meta Platforms (NASDAQ:META) said this week it will spend $600 billion on AI over the next three years. Zuckerberg later posted on Threads that it’s possible the company will invest more than $600 billion during those three years. He even said a “significantly higher number” was likely through the end of the decade.
Microsoft (NASDAQ:MSFT) made another big AI deal this week by securing a five-year, $17.4 billion AI infrastructure deal with Nebius (NASDAQ:NBIS). This type of rapid spending indicates AI growth can continue beyond the current rally.
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Artificial intelligence plays a critical role in the stock market’s performance based on the top companies in major benchmarks like the S&P 500 and Nasdaq. Data from Slickchart shows that top AI beneficiary Nvidia (NASDAQ:NVDA) makes up approximately 7% of the S&P 500.
The top eight publicly traded corporations on the S&P 500 are all heavily invested in artificial intelligence. They are ramping up their AI spending and aim to release products and services that use AI. These eight companies make up more than 36% of the S&P 500.
There are also corporate giants outside of the S&P 500’s top 10 that still invest heavily in artificial intelligence. Oracle (NYSE:ORCL), Palantir (NASDAQ:PLTR), and Cisco (NASDAQ:CSCO) are some of the most notable S&P 500 members in the category.
Those three stocks make up more than 2% of the S&P 500 combined, and if they continue to outpace stocks with less of a focus on AI, then the technology’s influence on the stock market will continue to grow. If the AI trade fades, many stocks will lose value and drag the S&P 500 considerably lower from its current levels.
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It’s almost never a good idea to sell stocks just because of headlines or what an analyst says in a research note. However, Hammond reportedly brings up a point that some investors are ignoring. What if AI spending eventually slows down? There’s only so much money and profits big tech can spend on AI, so growth rates will eventually have to decrease.
It can still take a few years before a meaningful slowdown in the growth of AI spending, and decelerating growth rates don’t necessarily translate into big tech pulling out of AI spending completely.
Investors should consider the bullish and bearish points of any of their positions. While the stock market is exuberant on AI and its long-term potential, it’s good to consider the possible downside of any slowdowns in AI spending.
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This article Goldman Sachs Warns An AI Slowdown Can Tank The Stock Market By 20% originally appeared on Benzinga.com
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