Visions: Out & About in Our World This Weekend With Some #RandomThoughts

Forecast Change: The probability of a US recession in the next year has fallen to 20%

The probability of a U.S. recession in the coming year has declined, as recent economic data signal that bringing inflation down to an acceptable level will not require a recession, according to Goldman Sachs Research. Our economists say there's a 20% chance of recession in the next 12 months, down from their earlier projection of 25%.

U.S. economic activity remains resilient, suggesting GDP will continue to grow — albeit at a below-trend pace, Jan Hatzius, head of Goldman Sachs Research and the firm's chief economist, writes in the team's report. And the inflation data has been encouraging. The 0.16% increase in the CPI (excluding food and energy) in June was the lowest since February 2021 and follows a string of 0.4% readings this year. Other measures of underlying inflation have also been easing for quite a while.

Generative AI: Hype or truly transformative?

Investor interest in generative AI technology has surged. But is the hype justified? The fact that generative AI can create new content using natural language prompts differentiates this technology from prior developments in AI, explains Goldman Sachs Research's Kash Rangan on Goldman Sachs Exchanges.

What's more, since the foundational models that lie at the heart of generative AI have already been trained on large datasets, companies can more easily and inexpensively leverage these “out of the box” capabilities to transform or enhance their businesses, says Sarah Guo, founder of AI-focused venture capital firm Conviction. “I think we're really entering this era of Software 3.0,” Guo says to Exchanges host Allison Nathan, whose team authored the Top of Mind report on which the episode is based. “The reasoning capabilities of these models that have so much general knowledge is now available to any company that wants to go invest in it.”

But Gary Marcus, professor emeritus of psychology and neural science at New York University, cautions that generative AI technology isn't yet as transformative as it is made out to be. “There's definitely some learning in these systems,” says Marcus, who has done extensive research on AI. “But they're not learning abstract ideas. They're not learning abstract concepts. There's a lot of learning that we do about the world that they don't really do.”

For now, the vast majority of companies that have recently outperformed on the AI theme still appear to be trading at relatively reasonable multiples, says Goldman Sachs Research's Eric Sheridan.

Click here for more Goldman Sachs insights on artificial intelligence.

Why the Nasdaq 100's rebalancing matters for investors

On July 24, the Nasdaq 100 (NDX) will undergo a “special rebalance,” which is meant to curb the high concentration in the index of a handful of tech stocks. The weight of the seven largest stocks in the index will be reduced by 12 percentage points (from 56% to 44%).

While mutual funds and exchange traded funds have around $260 billion in assets benchmarked to NDX, the special rebalance in 2011 suggests the stock-level impact will be limited, Goldman Sachs Chief U.S. Equity Strategist David Kostin writes in the team's report. During that event, Nasdaq slashed the NDX weight of Apple stock from 20% to 12%, but this change had no clear negative effect on the stock's performance. Likewise, there was no clear impact on Microsoft despite its index weight rising by nearly 5 percentage points to 8% following the rebalance. In fact, Microsoft lagged Apple during the weeks around the rebalance.

Rather than the special rebalance, Kostin expects earnings growth, valuation, and the macro environment to drive returns for the NDX and its largest stocks during the next six months. Consensus bottom-up 2023 EPS estimates for NDX have fallen by just 1% this year, compared with a 5% decline for S&P 500 EPS. In addition to an improving near-term economic outlook, investor optimism regarding AI and the end of Federal Reserve tightening have lifted the NDX forward P/E multiple by 32% (21x to 28x) leading to a year-to-date return of 42% for the index and 65% for its largest seven stocks.

For more, listen to our interview with Kostin in The Markets from Goldman Sachs Exchanges. Every Friday morning in just 10 minutes or less, we break down the key issues moving markets. Find us wherever you listen to podcasts.

Ask not why it happened, but what you are going to do about it.
- Jonathan Lockwood Huie

When faith and hope fail, as they do sometimes,
we must try charity, which is love in action.
We must speculate no more on our duty,
but simply do it.
When we have done it, however blindly,
perhaps Heaven will show us why.
- Dinah Maria Mulock

Always question WHY you are doing something.
- Jonathan Lockwood Huie