The likelihood of a US recession falls even further

- Generative AI: Hype or truly transformative? # # --------------------------------------------------------------- The key takeaways today: - Why the Nasdaq 100 is rebalancing - Generative AI: Hype or truly transformative? - Oil and gas projects are booming Was this newsletter forwarded to you? ([Sign up now.]( --------------------------------------------------------------- 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. 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. --------------------------------------------------------------- What does the boom in oil and gas projects mean for energy prices? The oil and gas industry has emerged from a prolonged period of underinvestment and is ramping up: The industry has 70 major projects under development worldwide, a 25% increase from 2020, according to [Top Projects]( Goldman Sachs Research's 20th annual analysis of the energy sector. Even with higher investment, production gains remain elusive. A lot of projects have five to six years time-to-market, explains Michele Della Vigna, head of Goldman Sachs natural resources research in EMEA. That means we are still paying for underinvestment in the 2015 to 2021 period. Even with the capex increase, it's very unlikely that non-OPEC producers can come back to growth.   Three factors are driving the rebound in energy investment. First is the Russia–Ukraine conflict, which has given new urgency to energy capex. Second, the profitability of new investments is higher — and has been high for two or three years. Third is the ongoing recovery in demand post-Covid. Because of these three elements, GS Research projects close to 10% per annum capital expenditure growth in the energy sector over the next five years.  Capex is still below the peak prior to the drought in investment. Even though capex is coming back from the trough, it is well below what it used to be in the 2010 to 2013 period. Demand, meanwhile, has crossed the pre-Covid level and is reaching new historic highs, and GS Research sees an $80 per barrel price needed to balance the oil market. --------------------------------------------------------------- ICYMI: Where are stocks in the market cycle? Equities markets usually have four phases, and [right now stocks are in the “optimism” stage]( according to our Chief Global Equity Strategist Peter Oppenheimer. He expects relatively low returns from here as stocks trade in a wide range. --------------------------------------------------------------- Briefings Brainteaser: How many oil and gas megaprojects are in development worldwide? Oil and gas investment fell for seven straight years but began to rise again last year. How many megaprojects do global oil and gas producers have in development in 2023? A) More than 100 B) 83 C) 70 D) Fewer than 50 [Check the answer here.]( --------------------------------------------------------------- Goldman Sachs in the news [CNBC]( July 17 [China is facing more challenges in restructuring its economy: Goldman Sachs (1:38)]( [CNBC]( July 17 [A lot of headwinds are fading on the oil market, says Goldman Sachs' Daan Struyven (3:43)]( --------------------------------------------------------------- --------------------------------------------------------------- Some of the images used in this newsletter are sourced via Getty Images. The data provided in this newsletter is for information purposes only and should not be construed as investment or tax advice nor as a recommendation to buy, sell, or hold any particular security. Goldman Sachs believes the data in this newsletter is accurate, but does not verify its accuracy independently and does not warrant or guarantee that it is accurate or complete. Goldman Sachs has no obligation to provide any updates or changes to the data. No investment decisions should be made using this data. Past performance is not indicative of future performance. To the extent this newsletter includes material from Goldman Sachs Global Banking & Markets, please [click here]( for information relating to Goldman Sachs Global Banking & Markets material and your reliance on it. The Investment Strategy Group, part of the Asset & Wealth Management business (“AWM”) of GS, focuses on asset allocation strategy formation and market analysis for GS Wealth Management. Any information that references ISG, including their model portfolios, represents the views of ISG, is not financial research and is not a product of GS Global Investment Research and may vary significantly from views expressed by individual portfolio management teams within AWM, or other groups at GS. To the extent this newsletter includes material from Goldman Sachs Asset Management, please [click here]( for additional disclosures. [Click here]( to unsubscribe. © 2023 Goldman Sachs, All rights reserved. 200 West Street, New York, NY 10282, USA --------------------------------------------------------------- [GS.comÂ]( |  [Careers Blog](  | [Privacy and Security](  | [Terms of Use]( [Twitter](