Goldman Sachs pointed out that approximately 75% of the equity value of the S&P 500 now stems from 'terminal value' (i.e., forward earnings expectations beyond a decade), approaching levels seen during the peak of the internet bubble. A one-percentage-point reduction in long-term growth rates could lead to an overall valuation contraction of 15%, with high-growth stocks facing an impact as significant as 29%. Amid narratives of AI-driven disruption, market sell-offs have been concentrated in high-margin industries such as software, reflecting a repricing of long-term growth rather than deterioration in short-term fundamentals.
The AI disruption narrative is reshaping the pricing logic of U.S. equities. According to the latest research by Goldman Sachs, investors' concerns about artificial intelligence potentially impacting companies' long-term profitability have shifted market focus to the most difficult and sensitive part of stock valuation — 'terminal value,' which refers to forward earnings expectations beyond a decade.
According to Storm Chaser Trading Platform, in a report released on April 27 by Goldman Sachs, it was estimated that approximately 75% of the equity value of the S&P 500 index currently comes from terminal value, close to the highest level in twenty-five years, echoing the optimism seen during the dot-com bubble era. Goldman Sachs also calculated that for every one-percentage-point decline in long-term growth assumptions, the enterprise value of S&P 500 constituents would shrink by about 15%; for high-growth stocks, this impact could reach as high as 29%.
Goldman Sachs stated that the debate surrounding AI disruption — and the resulting uncertainty in terminal value — is expected to persist for at least several quarters. 'The threat of disruption will likely remain a persistent headwind until AI applications enter a more mature phase.'
Terminal value as a proportion approaches a 25-year high, resembling levels seen during the dot-com bubble period.
Using a modified 10-year dividend discount model (DDM), Goldman Sachs estimated that approximately 75% of the equity value of the S&P 500 index is concentrated in the terminal value portion, which represents the far-forward value beyond the model's 10-year forecast period. This ratio is historically high and bears significant resemblance to the optimistic expectations during the internet boom of 2000.
Goldman Sachs pointed out in its report that the high proportion of terminal value reflects the market's optimistic expectations for long-term growth but also implies that valuations are highly sensitive to changes in long-term growth assumptions. 'Today’s relatively elevated share of terminal value within equity valuations mirrors periods when other investors’ long-term growth expectations became increasingly optimistic, including during the internet boom.'
In terms of industry distribution, high-growth and high-margin industries exhibit significantly higher proportions of terminal value compared to low-growth sectors. Goldman Sachs' calculations show that for high-growth stocks, terminal value accounts for about 84% of enterprise value; for the S&P 500 as a whole, the figure is approximately 72%; while for low-growth stocks, it stands at around 59%.
The software sector has borne the brunt of the sell-off, with competitive pressures from AI spreading to asset-light industries.
At the heart of concerns over AI disruption is the possibility that artificial intelligence could spur low-cost competition in industries with lower entry barriers, thereby suppressing revenue growth and profit margins of existing companies. Goldman Sachs noted that the sectors deemed most vulnerable to disruption are precisely those that have experienced the fastest growth and highest profit margins in the past.
The software sector has been the epicenter of this round of sell-offs. According to Reuters, the S&P 500 Software & Services Index has fallen approximately 17% year-to-date, primarily driven by concerns that new AI tools could erode future revenue growth and profit margins. The Goldman Sachs report also highlighted that a group of software stocks had declined 19% since the beginning of the year, with selling pressure spreading to other asset-light industries.
Notably, the recent earnings expectations for these stocks remain robust, and the sharp decline in stock prices starkly contrasts with the resilience of short-term fundamentals. This highlights the market's repricing of long-term growth prospects rather than pessimism about near-term performance.
The long-term growth rate is the most critical driver of valuation, but short-term fluctuations are dominated by near-term expectations.
Empirical analysis by Goldman Sachs shows that, from a cross-sectional perspective, a company’s long-term growth expectations are the most important determinant of its valuation multiples. For every one standard deviation increase in implied long-term growth, the corresponding forward price-to-earnings ratio rises by approximately 0.6 standard deviations (equivalent to about 4 times the P/E ratio), which is roughly three times as significant as near-term earnings growth, balance sheet strength, market capitalization, and earnings stability.
However, when explaining short-term valuation changes, the role of near-term growth expectations and risk premiums becomes more prominent. Goldman Sachs notes that since 1990, the explanatory power of near-term growth expectations for quarterly changes in valuation multiples has been approximately three times that of long-term growth expectations. This is because the volatility of long-term growth expectations is much lower than that of near-term expectations, resulting in relatively slower changes over the short term.
This structural characteristic implies that when the narrative of AI disruption truly undermines market confidence in long-term growth, its impact on valuations will be profound and difficult to reverse.
Goldman Sachs recommends that companies strengthen long-term communication, and accelerating share repurchases may serve as a signal of confidence.
Facing a market environment characterized by rising terminal value uncertainty, Goldman Sachs believes that corporate management should take proactive measures. The report highlights the importance of conveying long-term growth plans to investors, but the current situation is concerning – in the latest round of earnings calls, only 5% of S&P 500 companies discussed financial metrics beyond five years, primarily concentrated in the utilities and real estate sectors.
Goldman Sachs advises that more executives should prioritize communicating about long-term prospects, including addressable market size, growth pathways, and profitability outlooks, even though multi-year earnings guidance inherently involves uncertainties.
Additionally, Goldman Sachs suggests that accelerated share repurchase programs (ASRs) can serve as a tool for management to convey confidence to the market. Academic research generally finds that announcements of ASRs often lead to positive stock price reactions, with magnitudes greater than those of regular repurchase programs. However, Goldman Sachs also cautions that large-scale buybacks are sometimes interpreted as a lack of growth opportunities; thus, management should align the scale of ASRs with positive statements about future growth prospects to avoid mixed signals.
Editor/Lee