Artificial intelligence-related stocks have recently experienced a significant drop, but amid expected interest rate cuts and strong fundamentals, Goldman Sachs Group Inc.'s trading division believes it's time to buy on the dip. Bloomberg writes about it , UNN reports .
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“We expect lower interest rates to support IT projects, economic policy to become less uncertain after the election, and tangible progress in AI developments to be presented at upcoming conferences,” Faris Murad, vice president of Goldman's US Individual Basket team, wrote in a note to clients on Thursday.
Goldman's Broad AI basket, which includes companies such as Nvidia Corp, Microsoft Corp, Apple Inc, Alphabet Inc, Amazon.com Inc, Meta Platforms Inc, and Oracle Corp, has fallen 11% from its 2024 high reached on July 10. Market weakness is not limited to Magnificent 7 shares. Earlier this year, Goldman launched two baskets focused on the growing demand for data centers and energy to support AI development. However, since mid-July, the AI data center basket has dropped 8%, and the Power Up America basket has lost 5%.
Traders' expectations that the Federal Reserve will cut interest rates by half a percentage point during its meeting that ends on Wednesday have caused a rotation away from mega-cap tech stocks and toward economically sensitive market segments. In addition, the latest reporting season showed that corporate spending on AI is not yielding the expected results as quickly as investors had hoped.
Although this has raised concerns among some investors, Goldman sees this as a buying opportunity.
“There is too much pessimism about AI right now,” Murad writes. “AI baskets are cheap compared to earnings trends to date, and they may need a new bad news story to move lower, which we think is unlikely.”
Fundamentals play a key role in Goldman's thesis. The bank expects AI-related companies' net income to roughly double over the next 12 months. They also see further growth in the energy sector related to this technology.
“The performance of the energy theme this year was driven primarily by earnings growth in this segment as independent power producers and regulated utilities in the U.S. provided positive updates on data centers in the most recent reporting season,” Murad wrote.
For example, independent power producer Vistra Corp. is up 131% this year, and Constellation Energy Corp. is up 69%. Both companies are part of the Power Up basket and are usually traded in the context of AI-related sentiment. Although they lost some momentum after reaching their highs in late May, both recently reported results that exceeded expectations, and AI investments will continue to push these energy companies' shares up, Goldman notes.
“We continue to see data centers as the largest driver of energy demand growth in the United States,” Murad concluded.