AI is disrupting the most hidden link: terminal value volatility is reshaping the entire US stock market.

AI’s disruptive narrative is reshaping the pricing logic of US equities. The latest research from Goldman Sachs shows that investors’ concerns about AI potentially impacting companies’ long-term profitability have shifted market focus to the hardest-to-quantify and most sensitive component of stock valuation—the "terminal value," which refers to long-term profit projections ten years out and beyond.

According to Windmill Trading Desk, Goldman Sachs estimated in its April 27 report that about 75% of the current equity value of the S&P 500 Index comes from terminal value, approaching the highest level in the past 25 years, echoing the optimism seen during the dot-com bubble era. Goldman Sachs also calculated that for every 1 percentage point decrease in the assumed long-term growth rate, the enterprise value of S&P 500 constituent stocks would decline by about 15% overall; for high-growth stocks, the impact rises to 29%.

Goldman Sachs states that debates surrounding AI disruption—and the resulting uncertainty in terminal value—are expected to persist for at least several quarters. "The threat of disruption will likely exert persistent pressure until AI applications reach a more mature stage."

Terminal value share nears a 25-year high, similar to the dot-com bubble era

Using a revised 10-year dividend discount model (DDM), Goldman Sachs estimates that about 75% of the S&P 500’s current equity value is concentrated in terminal value—that is, value beyond the model’s 10-year forecast period. This ratio is historically high, closely resembling the optimistic expectations during the 2000 internet bubble.

Goldman Sachs points out in the report that a high terminal value share reflects the market’s optimistic expectations for long-term growth, but also means that valuations are extremely sensitive to changes in long-term growth assumptions. "Today, terminal value accounts for a historically high percentage of equity value, echoing periods of increasing investor optimism about long-term growth, including the internet boom era."

From an industry perspective, high-growth, high-margin sectors see terminal value comprising a far greater share than low-growth industries. Goldman Sachs's calculations show high-growth stocks’ terminal value accounts for about 84% of enterprise value, S&P 500 overall about 72%, and low-growth stocks about 59%.

Software sector hit first, AI competitive pressure spreads to asset-light industries

The core concern about AI disruption is that artificial intelligence may foster low-cost competition in industries with low barriers to entry, thereby suppressing revenue growth and profit margins of existing companies. Goldman Sachs notes that the industries perceived as most vulnerable to disruption are precisely those that have been growing fastest and had the highest profit margins.

The software sector is at the heart of this wave of sell-offs. According to Reuters, the S&P 500 Software & Services Index has fallen about 17% so far this year, mainly driven by worries that new AI tools may erode future revenue growth and margins. Goldman Sachs’s report also highlights that a group of software stocks have dropped 19% since the start of the year, with selling pressure now spreading to other asset-light sectors.

Notably, these stocks’ recent profit forecasts remain robust, and the sharp drop in share prices contrasts with the resilience of their near-term fundamentals, highlighting a market repricing of long-term growth prospects rather than pessimism about near-term performance.

Long-term growth rate is the key driver of valuation, but short-term fluctuations are dominated by near-term expectations

Goldman Sachs's empirical analysis shows that from a cross-sectional perspective, a company's long-term growth expectations are the most important determinant of its valuation multiple. For every one standard deviation increase in implied long-term growth rate, the corresponding forward P/E ratio rises by about 0.6 standard deviations (about 4 P/E points), making its importance roughly triple that of near-term profit growth, balance sheet strength, market cap, and earnings stability.

However, in explaining short-term valuation fluctuations, near-term growth expectations and risk premiums play a more prominent role. Goldman Sachs notes that since 1990, near-term growth expectations have about three times the explanatory power for quarterly changes in valuation multiples compared to long-term growth expectations. This is because volatility in long-term growth expectations is far lower than that of near-term expectations, and short-term changes are relatively sluggish.

This structural characteristic means that when AI’s disruptive narrative truly shakes market confidence in long-term growth, its impact on valuation will be profound and difficult to reverse.

Goldman Sachs advises companies to strengthen long-term communication and accelerate buybacks as a signal of confidence

Faced with a market environment of rising terminal value uncertainty, Goldman Sachs believes corporate management should take proactive action. The report points out that the importance of terminal value highlights the necessity of communicating long-term growth plans to investors, but the current reality is worrying—in the most recent round of earnings calls, only 5% of S&P 500 companies discussed financial metrics beyond five years, mostly concentrated in utilities and real estate.

Goldman Sachs suggests more management teams should prioritize communication about long-term prospects, including addressable market size, growth path, and projected profitability—even though multi-year performance guidance itself is inherently uncertain.

Additionally, Goldman Sachs proposes accelerating share buyback plans (ASR) as a tool for management to signal confidence to the market. Academic research generally finds that ASR announcements typically trigger positive share price reactions, with effects greater than regular buyback plans. However, Goldman Sachs cautions that since large-scale buybacks can sometimes be interpreted as a lack of growth opportunities, management should combine ASR scale with a positive outlook for future growth prospects to avoid mixed signals.

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The above highlights are from Windmill Trading Desk.

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