Artificial intelligence stocks have taken a heavy hit recently, but with lower interest rates looming and fundamentals still strong, Goldman Sachs Group Inc.’s trading desk believes it’s time to buy on dips.
“We expect lower interest rates to support IT projects, less uncertainty in economic policy after the election, and tangible progress in AI products to be presented at upcoming conferences,” Faris Mourad, vice president of Goldman’s U.S. Custom Baskets 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. The weakness goes beyond the sell-off in Magnificent 7 shares. Earlier this year, Goldman started Two baskets focused on booming demand for data centers and power to fuel AI development. But since mid-July, the AI Data Centers basket is down 8% and the Power Up America basket is down 5%.
Traders’ expectations that the Federal Reserve will cut interest rates by half a percentage point at its meeting ending on Wednesday are heated a rotation of megacap technology stocks into economically sensitive areas of the market. In addition, the recent earnings season showed that corporate spending on AI does not pay off as quickly as investors had hoped.
While this has caused fear among some investors, for Goldman it is a buying opportunity.
“There is too much pessimism about AI,” Mourad wrote. “AI baskets are cheap relative to year-to-date earnings trends. They may need new bad news to sink even further, but we think that’s unlikely.”
Fundamentals play a key role in Goldman’s thesis. The bank expects net profits of AI companies to roughly double over the next 12 months. It also expects stronger growth in electricity generation linked to the technology.
“The energy sector’s outperformance this year has been primarily driven by earnings growth in the space, as U.S. independent power producers and regulated utilities delivered positive data center numbers during the last earnings season,” Mourad wrote.
For example, independent power producers Vistra Corp. has gained 131% this year and Constellation Energy Corp. is up 69%. Both are in the Power Up basket and typically trade in line with AI-related sentiment. Granted, they’ve lost some momentum since hitting highs in late May. But both recently reported earnings that beat expectations, and capital investments in AI will continue to drive energy stocks like these higher, according to Goldman.
“We continue to view data centers as the single largest driver of electricity demand growth in the U.S.,” Mourad wrote.