Morgan Stanley on AI: Big Spending, Big Value Creation

(Illustration by Elias Stein)

Stock market gains are being fueled by expectations for hefty returns on the money being spent on artificial intelligence. Just how big could those returns turn out to be? Morgan Stanley analyst Stephen Byrd summed up the numbers. “Our analysis suggests S&P 500 companies could accrue annual net benefits totaling some $920 billion,” he wrote.

That isn’t chump change. Total S&P 500 pretax net income over the past 12 months, according to Bloomberg, was $2.5 trillion. An extra $920 billion could boost operating profit margins by six percentage points to over 22%, Barron’s calculations suggest. After-tax net income could rise by some 40%.

Created with Highcharts 9.0.1AI PowersFour of the biggest tech spenders on AI have seen their market value soar since​OpenAI inroduced ChatGPT at the end of 2022. Source: FactSet

Created with Highcharts 9.0.1Meta PlatformsAmazon.comAlphabetMicrosoft2023'250100200300400500600%

Creation of AI value, says Byrd, combines cost-cutting and new revenue. There’s a risk of job loss, but higher productivity typically leads to more employment in other areas. Capital outlays by Alphabet, Microsoft, Meta Platforms, and Amazon.com, much of it for AI, could reach some $340 billion in 2025, up 50% from 2024, and then climb 20% higher in 2026. From 2024 to 2026, the four may spend almost $1 trillion.

Created with Highcharts 9.0.1Software, Robots, ValueMorgan Stanley analyzed value creation for S&P 500 companies of two core forms of​AI: “agentic,” or software, and “embodied,” or robots. Source: Morgan Stanley

Created with Highcharts 9.0.1AgenticEmbodiedAgentic + Embodied$0 billion$200$400$600$800$1,000$1,200

Of course, benefits won’t happen all at once. And companies wouldn’t keep all of the gains; some would be passed along to consumers. Still, Morgan Stanley estimates that AI could be worth $13 trillion to $16 trillion in S&P 500 stock market value. With the S&P’s market cap now approaching $60 trillion, that implies an increase of 22% to 27%. That’s more than just trickle-down.

Write to Al Root at allen.root@dowjones.com

Last Week

Markets

Monday dawned with Ukraine President Volodymr Zelensky and European leaders meeting at the White House after President Donald Trump dropped his call for a cease-fire in talks with Vladimir Putin. Trump promised security guarantees if a deal is struck. Stocks opened up, then slid on Tuesday as tech sold off on artificial-intelligence concerns. At Jackson Hole, Federal Reserve chief Jerome Powell signaled a rate cut and sparked a Friday rally. On the week, the Dow industrials rose 1.5%, a new high, and the S&P 500 climbed 0.3%, while the Nasdaq Composite sank 0.6%.

Companies

Softbank’s Masayoshi Son agreed to buy a 2% Intel stake, while Trump said the government would convert Chips Act funds to a nearly 10% stake. Beijing told China firms not to use Nvidia H20 chips. Air Canada’s flight attendants ended their strike at the carrier. S&P Global kept its AA+ credit rating on the U.S., saying tariff revenue would offset the impact of the Trump tax and spending bill. The U.S. approved Novo Nordisk’s Wegovy for liver disease. Meta Platforms froze hiring in its AI unit.

Deals

An MCR Hotels–led group sealed a take-private deal for London’s private-club operator Soho House for $2.7 billion… Nexstar Media, the largest U.S. TV station owner, agreed to buy Tegna for $6.2 billion, blocking a bid for Tegna from Sinclair…Lowe’s said it was buying Foundation Building Materials for $8.8 billion…Mediobanca shareholders rejected a plan to buy Banca Generali.

Next Week

Wednesday 8/27

Nvidia will be the final member of the so-called Magnificent Seven group of megacap technology stocks to report quarterly results. Analysts polled by FactSet forecast that July-quarter sales for the artificial-intelligence chip titan increased nearly 53%, to $45.81 billion, while adjusted earnings rose to $1 a share from 68 cents in the same quarter of the prior fiscal year.

Thursday 8/28

Another wave of retailers will report quarterly results this week. After Five Below, Urban Outfitters, Abercrombie & Fitch, Foot Locker, and Kohl’s report on Wednesday, Thursday’s lineup will include Best Buy, Dollar General, Dick’s Sporting Goods, Burlington Stores, Ulta Beauty, and Gap.

Friday 8/29

The Bureau of Economic Analysis will wrap up this week’s calendar with a bang when it releases the personal consumption expenditures price index for July. Inflation reports earlier this month offered mixed signals. Economists polled by FactSet estimate that the PCE price index increased 0.2% from June. The core PCE, which excludes volatile food and energy prices, is expected to rise 2.9%, up 0.3% from the previous month.

The Numbers

$557 B

How much the market value of U.S. office buildings declined during the pandemic years of 2019 to 2023.

9%

The average U.S. tariff rate in May, as opposed to official 12% estimates. The reason: duty-free imports.

6.1%

The unemployment rate of recent computer science grads, among majors with the highest jobless rate.

40%

The decline in Americans who say they read for pleasure, in the years from 2004 to 2023.

Write to Robert Teitelman at bob.teitelman@dowjones.com