A $2 trillion cloud market

Using AI to gain a financial edge. # # --------------------------------------------------------------- The key takeaways today: - AI may help drive the cloud market to $2 trillion by 2030 - Why European bank stocks could continue their rally - The outlook for autonomous car sales - Can AI provide a fresh edge in financial markets? - Briefings Brainteaser: Which countries in the Americas will boost the supply of liquid fossil fuels this year? Was this newsletter forwarded to you? [Sign up now](. --------------------------------------------------------------- Cloud revenues could reach $2 trillion by 2030 amid AI rollout Cloud computing sales are expected to rise to $2 trillion by the end of the decade, [according to Goldman Sachs Research](. Generative artificial intelligence is forecast to account for about 10-15% of the spending. The total addressable market for cloud services is poised to expand at a 22% compound annual growth rate from 2024 to 2030, writes Kash Rangan, head of US software research in Goldman Sachs Research, in the team's report. Generative AI could constitute $200 billion to $300 billion of cloud spending as investment moves beyond mega technology companies and foundation model providers. Companies spending on digital transformation and cloud modernization will contribute to the surge in cloud computing sales, writes Rangan. Only about 30% of workloads have moved to the cloud, according to a recent survey by Goldman Sachs Research. The estimate for cloud revenue growth is also based on recent historical precedent — the market more than doubled between 2019 and 2023 to $496 billion, representing a 26% compound annual growth rate. At the same time, the team anticipates that spending for, and adoption of, generative AI will broaden out to more companies. As that happens, it will be a further catalyst for the cloud sector. And while the investor outlook on generative AI gyrates from excitement about its prospects to [skepticism about its viability]( there are signs that investment in the technology is resilient. Goldman Sachs Research's survey of IT buyers shows respondents expect 9% of their budgets to be potentially allocated to generative AI in three years, up from 7% indicated in an earlier survey in January. In case you missed it: Read [our previous article]( about how AI is poised to drive a 160% increase in data center power demand. --------------------------------------------------------------- European bank stocks are forecast to rally even more European bank stocks have climbed more than 25% during the past year as earnings rise. The bloc's lenders may rally even more amid a surge in stock buybacks and dividends, [according to Goldman Sachs Research](. Sharon Bell, senior strategist on the European Portfolio Strategy team, says Europe's banks have several important tailwinds: - Profits for lenders on the continent and in the UK have been healthy as interest rates have risen from rock-bottom, or even negative, levels. Banks' return-on-equity (a key measure of bank profitability) has roughly doubled over the past decade or so. - European banks are returning money to shareholders via stock buybacks and dividends. They're able do so because they have amassed enough capital and have strong earnings. There are also signs that European corporate management is more open to stock buybacks than in the past. - While central banks are cutting rates, Bell and her colleagues in Goldman Sachs Research don't expect Europe's central banks to return to ultra-low or negative rates in this economic cycle. “That's extremely important for banks' profitability,” she says. - European bank stocks could help diversify portfolios at a time when equity markets in the US and Europe are dominated by a handful of stocks. “It's certainly a different type of exposure,” Bell says. In case you missed it: Read [our previous article]( about how to navigate a deepening global stock correction. --------------------------------------------------------------- The outlook for autonomous car sales Industry expectations for autonomous vehicles range from optimism about imminent breakthroughs to pessimism that self-driving cars will ever hit the road on a wide scale. However, Goldman Sachs Research sees signs that [partial automation and assisted driving are becoming more widespread](. The ramping-up of fully automated cars is taking longer than previously anticipated, but the segment will continue to grow and, in the longer term, be a larger part of the market. “Improved AI technology will help the industry reach higher levels of performance, although we also believe that wide scale AV adoption is still at least a few years away as a base case,” Mark Delaney, who covers automobiles and industrial technology for Goldman Sachs Research, writes in his team's report. By 2030, up to 10% of global new car sales could be Level 3 vehicles: self-driving cars that let drivers take their eyes off the road and their hands off the wheel in select situations, such as on a highway in clear weather. (The previous forecast was roughly 12%.) Sales of fully autonomous cars — Levels 4 and 5 — could amount to 2.5% of total sales in the same timeframe (compared with the previous forecast of 3.5%). At the same time, partially autonomous Level 2 / Level 2+ vehicles that require driver supervision are forecast to rise from about 20% of sales this year to about 36% in 2035. The previous forecast was around 31%. In case you missed it: Read [our previous article]( about why EV sales are slowing. --------------------------------------------------------------- How investors could use generative AI for a financial edge For generative AI models largely trained on “stationary” data — unchanging over time — the financial markets present a unique challenge. Companies and markets change rapidly. Given this, traders and investors may eventually ask: Can AI provide alpha — a fresh edge in financial markets? In a note published by the Goldman Sachs Global Institute, Dimitris Tsementzis, the head of Goldman Sachs' Applied Artificial Intelligence team in the engineering division and a 2024 member of the GSGI's fellows program, identifies some potential sources of alpha: - Generative AI can digest more raw and diverse data than financial models have traditionally used. “Instead of creating a ‘sentiment factor' by counting positive vs. negative mentions of a company in news articles,” Tsementzis writes, an AI model might directly imbibe raw news articles, and even the images and data in those articles, to learn how to gauge market sentiment beyond just positive and negative mentions. - One AI model could carry out all tasks performed by many separate specialized financial models. Instead of having a pricing model predicting the price of a security, a separate market impact model to compute the slippage of trading that signal, and yet another model that suggests a hedge, a single AI agent could compute it all. - With AI, discretionary portfolio managers could use the kinds of technological capabilities usually employed by systematic funds (e.g., large-scale analyses of data through code) while retaining their own existing human edge (deep expertise in individual markets). - Generative AI could lead to more specialized foundation models, such as for analyzing financial time series. “You can imagine a future when the idea of pricing a security is purely a matter of technology vs. math,” Tsementzis writes. The human edge — the “art,” as he calls it — would then lie in the particular kinds of data selected for the model to work on, rather than the equations that the model employs. --------------------------------------------------------------- Briefings Brainteaser: Volumes up In 2024, Goldman Sachs Research expects the supply of liquid fossil fuels — such as natural gas liquids and crude oil — outside of Russia and the OPEC nations to grow by 1.3 million barrels per day, compared to an earlier forecast of 1.1 million barrels per day. This growth will likely come from three countries in the Americas. If two of these are the US and Canada, which is the third? A) Guyana B) Venezuela C) Colombia D) Brazil [Check the answer here](. --------------------------------------------------------------- Goldman Sachs in the news By clicking on these links, you will be redirected to external websites that Goldman Sachs does not own or operate. 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