A 5% margin improvement could blow past AI’s $600B value gap

Everyone wants to know where the AI revenue or market value will come from. 

Long term, we think it’s clear that revolutionary new technologies will be built thanks to AI (see recent Nobel prizes in Chemistry and Physics). There are all the promising ways AI can be applied to healthcare. But people are sweating the next ten years. 

How can AI be worth all this investment? The answer is in the margins. 

AI is a tectonic wave in technology that can apply to every industry. So what if the best companies gain a 5% net margin improvement across the board thanks to AI? This could happen through automation savings, greater sales efficiency, increased productivity, and more.

To imagine the impact of this margin improvement, we took two approaches, one based on the Nasdaq and one on the S&P 500. 

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Nasdaq:

There are over 3,000 companies included in the Nasdaq composite, so we focus on just the top 10%. This ranges from Apple, with a market cap of over $3 trillion, to companies like Confluent, with a market cap of over $8 billion, and companies in other industries. The collective net income for all these companies in the top 10% is estimated to surpass $1 trillion in 2025. A 5% improvement on this figure would be over $50 billion. 

Alternatively, if we want to assume a 5% improvement in net income margin, for instance, ~17% net margin improving to ~22%, that is different. In that scenario, the improvement in Year 1 would be over $300 billion for the Nasdaq top 10%.

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S&P 500:

Using the S&P 500 index, we see a similar size range for companies. This group is projected to have a collective net income of roughly $2.5 trillion, so a 5% net income improvement would add over $120 billion in annual net income. 

Alternatively, if we assume a 5% improvement in net income margin, the improvement in just one year would be roughly $900 billion for the S&P 500 cohort. 

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It gets really fun when you average the ~$300B improvement for Nasdaq and $900B for S&P because that equals the $600B gap for AI that exists right now.

While a 5% improvement might seem aggressive, consider how companies are just beginning to restructure themselves in the age of AI. You see it in companies like Klarna, which uses AI to accomplish the work of hundreds. Then there are giants like Meta, who have had six straight quarters of revenue growth and YoY operating margin improvement as they reorganize their business around AI.

This margin improvement doesn’t even include AI's substantial revenue growth potential from new products. We are still just a little over two years into a wave of adoption that will last at least a decade, and the growth rates are impressive. In their most recent earnings call, Microsoft shared that “only 2.5 years in, our AI business is on track to surpass $10 billion of annual revenue run rate in Q2. This will be the fastest business in our history to reach this milestone.”

It’s still so early, and small margin improvements can compound to make history.

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_{Data source: Factset estimates, using GAAP 2025 net income estimates.}