Goldman trading desk says it’s time to buy a dip in AI stock

(Bloomberg) — Artificial intelligence stocks have taken a beating recently, but with lower interest rates and fundamentals remaining solid, Goldman Sachs Group Inc.’s trading desk. consider it time to buy the dip.

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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 with AI products to be presented at upcoming conferences,” wrote Faris Mourad, vice president of Goldman’s custom baskets team. of the US in a note to clients on Thursday.

The Goldman 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. down 11% from 2024 high hit July 10. Weakness overwhelms sell-off in Magnificent 7 stocks. Earlier this year, Goldman launched two baskets focused on expanding demand for data centers and the power to boost AI development. But since mid-July, the AI ​​data center basket is down 8% and the Power Up America basket has lost 5%.

Traders’ expectations of a half-point interest rate cut by the Federal Reserve at its meeting on Wednesday fueled a spin from megacap technology stocks to economically sensitive corners of the market. In addition, the most recent earnings season showed that corporate spending on AI is not paying off as soon as investors had hoped.

While this has sparked fear among some investors, for Goldman it is a buying opportunity.

“There is too much AI pessimism,” Mourad wrote. “AI (baskets) are cheap on year-to-date earnings trends, may require bad news to go forward, which we think is unlikely.”

Fundamentals play a key role in Goldman’s thesis. The bank expects net income from AI companies to roughly double over the next 12 months. It also sees more growth in technology-related power generation.

“The outperformance of the energy theme this year is primarily driven by earnings growth in this space, as US independent power producers and regulated utilities provided positive data center updates during the last earnings season,” Mourad wrote.

For example, independent power producer Vistra Corp. has gained 131% this year, and Constellation Energy Corp. increased by 69%. Both are in the Power Up basket and usually trade in line with AI related sentiment. Of course they have lost momentum since hitting highs in late May. But both recently reported earnings that beat expectations and capital investment around AI will continue to push energy stocks like these higher, according to Goldman.

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“We continue to see data centers as the largest driver of US energy demand growth,” Mourad wrote.

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