AI Disruption Fears Cut S&P 500 Long-Term Value by 15%, Goldman Says

A stark warning from Goldman Sachs suggests the market is repricing long-term growth, estimating that a 1 percentage point drop in long-term growth assumptions could slash enterprise value for the S&P 500 by 15 percent as investors grapple with the disruptive power of AI.

"The debate around AI disruption—and the resulting uncertainty for terminal value—is likely to be a multi-quarter, if not multi-year, debate," Goldman Sachs analysts said in a report dated April 27. "The disruption threat is likely to be a persistent overhang until AI applications enter a more mature phase."

The report estimates that about 75% of the S&P 500's current equity value comes from its "terminal value"—earnings projected more than a decade away—a concentration not seen in 25 years, echoing the dot-com bubble. The impact is sharpest for high-growth stocks, which could see a 29% value compression from the same 1-point drop in growth expectations. This repricing has savaged the software sector, with the S&P 500 software and services index falling about 17% year-to-date.

The core issue is that AI may allow new, low-cost competitors to erode the moats of once-dominant software companies, calling into question their long-term profitability. This "SaaSpocalypse," as some have termed it, has punished stocks like ServiceNow (NOW), down 44.6% year-to-date, and Salesforce (CRM), which has fallen over 40% from its highs, as investors question the durability of seat-based subscription models in an era of AI agents.

Software Suffers as Hardware Soars

The sell-off in software has been brutal and may not be over, according to RBC Capital Markets. Strategist Lori Calvasina noted that Wall Street has not yet fully marked down earnings estimates for software companies, suggesting another round of selling could be coming. The pressure is widespread, with Adobe (ADBE) stock dropping nearly 20% recently amid concerns that generative AI tools could cannibalize its core creative suite.

In a stark contrast to the software sector's woes, companies providing the hardware that powers AI are booming. Data storage stocks have been among the market's top performers this year. Sandisk has more than quadrupled, while Western Digital and Seagate have doubled. The demand for AI infrastructure has been so strong that Morgan Stanley recently named Seagate its "top pick" in IT hardware, expecting the broad benefits from a shortage of data storage to last through 2028.

A Call for Clarity

Goldman's report highlights a communication gap, noting that only 5% of S&P 500 companies discussed financial metrics beyond a five-year horizon in recent earnings calls. The bank suggests that management teams should more proactively communicate their long-term strategy for navigating AI disruption.

In the absence of clear long-term guidance, investors are left to weigh the immediate AI tailwinds for hardware against the existential threats facing software. The divergence underscores a fundamental reshaping of the tech landscape, where the long-term winners and losers of the AI revolution are being re-evaluated in real time.

This article is for informational purposes only and does not constitute investment advice.