Goldman Sachs: AI Profit Problem Worsens as Spending Outpaces Returns

The artificial intelligence industry faces a growing profitability crisis despite massive investment, according to Goldman Sachs' head of global equity research Jim Covello.

Speaking on the bank's "Exchanges" podcast published Tuesday, Covello said the business case for AI remains unproven even as spending accelerates. "We've gotten further away from that over the last couple years instead of closer to it," he noted, explaining that rising investment levels require correspondingly larger profits to justify the expenditures.

The assessment comes as companies pour hundreds of billions of dollars into AI infrastructure while the S&P 500 reaches record highs, creating tension between market enthusiasm and fundamental economics.

Why it matters

This analysis from a major Wall Street research leader highlights a critical disconnect in the AI boom: while markets reward AI investments with higher valuations, the actual return on those investments remains elusive for most participants. The concentration of profits among semiconductor companies, rather than distributed across the technology stack, suggests the current AI economic model may be unsustainable for cloud providers and enterprise adopters bearing the largest costs.

Semiconductor companies capture all the value

Covello identified an unusual pattern in the current AI cycle. "All of the economic value has continued to accrue to the semiconductor companies," he said, contrasting this with previous technology booms when chipmakers prospered alongside their customers.

Today, semiconductor firms have captured outsized profits while companies higher in the AI supply chain—including major cloud providers ramping up capital expenditures—have yet to demonstrate comparable economic returns. "In a lot of ways, companies are losing more money today implementing this technology than they were two years ago," Covello said.

Fear drives spending beyond proven returns

The primary force sustaining AI investment isn't demonstrated profitability but fear of competitive disadvantage. "There is a tremendous amount of FOMO at every level of the supply chain," Covello observed, with spending outpacing proven returns.

Companies worry about scenarios where AI delivers transformative capabilities and competitors master those applications first. This defensive positioning drives continued investment even without clear paths to profitability.

Some positive developments

Covello acknowledged several areas where AI has exceeded his expectations: consumer adoption has proven stronger than anticipated, AI models have advanced rapidly, and companies continue increasing technology spending. However, these developments haven't resolved the fundamental question of whether investments will generate adequate returns.

"At some point, you got to make money," Covello said. "You make investments in a business so that you can generate returns and make money."

These details were first reported by Business Insider.