The S&P 500 (^GSPC 0.06%) tumbled as much as 25% in 2022 as runaway inflation and rising interest rates weighed on the stock market. Against that backdrop, Tom Lee of Fundstrat Global Advisors turned heads when he predicted the index would rally 24% in 2023 despite the growing risk of recession.
Lo and behold, his estimate was the most accurate on Wall Street. The S&P 500 surged 24.2% in 2023 as market sentiment was revitalized by economic resilience and enthusiasm surrounding artificial intelligence. Of course, one good forecast does not mean Lee has a crystal ball, but it does lend credit to his latest prediction.
Specifically, Lee recently told Bloomberg the S&P 500 could reach 15,000 by 2030 as demand for artificial intelligence ripples through the economy. That implies 174% upside from its current level of 5,465, which is equivalent to an annual return of 16.7% through the end of the decade.
Investors can capitalize on that opportunity by purchasing shares of an S&P 500 index fund like the Vanguard S&P 500 ETF (VOO 0.03%). Read on to learn more.
The Vanguard S&P 500 ETF can help investors capitalize on artificial intelligence
The Vanguard S&P 500 ETF tracks the performance 500 large U.S. companies. The index fund is diversified across value stocks and growth stocks from every market sector, and it covers about 80% of domestic equities and more than 50% of global equities by market capitalization.
In short, the Vanguard S&P 500 ETF lets investors spread money across many of the most important companies in the world. The 10 largest holdings in the index fund are listed by weight below.
- Microsoft: 6.9%
- Apple: 6.3%
- Nvidia: 6.1%
- Alphabet: 4.2%
- Amazon: 3.6%
- Meta Platforms: 2.3%
- Berkshire Hathaway: 1.7%
- Eli Lilly: 1.5%
- JPMorgan Chase: 1.3%
- Broadcom: 1.3%
A record 199 companies in the S&P 500 discussed artificial intelligence (AI) on their latest earnings calls, according to FactSet Research. Many of them will benefit from AI in the years ahead, but they will do so in different ways.
For instance, some companies will monetize AI in an overt manner, such a designing specialized chips, providing cloud services, and infusing intelligence into consumer products. But other companies will monetize AI in a subtle manner, such as automating behind-the-scenes processes to improve productivity.
The S&P 500 has been a profitable investment over long periods
Every investment involving the stock market carries risk. But purchasing shares of an S&P 500 index fund has historically been a reliable way to make money in the stock market over long periods. In fact, the odds of a positive return increase as holding period lengthens.
Using data back-tested to 1928, investors that bought and held an S&P 500 index fund (or its equivalent) profited during 89% of five-year periods, 94% of 10-year periods, and 100% of 20-year periods. And the profits have usually been robust.
The S&P 500 delivered a supercharged return of 2,050% during the last three decades, compounding at 10.7% annually. At that pace, $400 invested monthly (less than $100 per week) would grow into more than $1 million over the next three decades.
Investors may expect to pay a premium for those returns. But the Vanguard S&P 500 ETF has a below-average expense ratio of 0.03%, meaning investors will pay just $0.30 per year for every $1,000 invested in the index fund.
The S&P 500 may not reach 15,000 by 2030, but the Vanguard S&P 500 ETF is still a smart investment
S&P 500 earnings per share -- the total earnings of all 500 companies divided by the divisor used to calculate the index -- increased at 7% annually over the last decade. Meanwhile, the S&P 500 advanced 158%, achieving an annual price return (meaning dividends are excluded) of 9.9%, during that period.
It stands to reason that, for the S&P 500 to return 16.7% annually through 2030, earnings growth would need to accelerate in the coming years. Indeed, for the underlying price-to-earnings ratio to remain constant, S&P 500 earnings growth would have to accelerate by about 7 percentage points. I doubt AI can make that happen.
Indeed, Goldman Sachs estimates that AI will boost U.S. economic output by 1.5% annually over the next decade. That is impressive, but probably not impressive enough to accelerate S&P 500 earnings growth by 7 percentage points. To that end, Tom Lee's price target of 15,000 by 2030 appears overly optimistic.
Regardless, the Vanguard S&P 500 ETF is a worthwhile long-term investment. It lets investors spread money across hundreds of influential companies, many of which are bound to benefit from AI. And the S&P 500 has be a reliable moneymaker for patient investors in the past.
