Here’s what Goldman Sachs sees as the “magic” moment for tech stocks

For the big tech stocks to rise again, it will take the convergence of two factors, says Kash Rangan, veteran technology analyst at Goldman Sachs.

The magic formula is a steady dose of interest rate cuts from the Federal Reserve, combined with a burst of innovation that drives earnings growth of more than 20%.

“We need to bring the industry back from an 11% growth rate to 20%-30%, and to do that, new innovation has to happen,” Rangan told Yahoo Finance at the Goldman Sachs Communacopia & Technology Conference on Monday .

Rangan — a bull on Microsoft ( MSFT ) and Salesforce ( CRM ) — says the tech sector needs to deliver on the AI ​​front in areas like customer sales and monetization.

“When you combine that innovation with lower rates, the magic happens,” Rangan said.

Investors’ attention is squarely on the Fed as it approaches its next monetary policy decision on September 18.

The Fed widely telegraphed its first interest rate cut in years as it seeks to stabilize an economy that is beginning to slow.

“I wouldn’t rule out 50 basis points, but 25 basis points seems more likely,” Goldman Sachs chief economist Jan Hatzius told Yahoo Finance on the conference call.

“I think there is a strong rationale for doing (a 50 basis point cut). And the rationale is that five and three-eighths, five and a quarter to 5.5% is a very high federal funds rate. It is the highest policy rate in the G10, despite the fact that the US has actually made more progress on inflation than most G10 economies,” Hatzius added.

As for the other component, it may take a bit longer – although signs of fresh innovation in the AI ​​growth story are beginning to surface.

Salesforce co-founder and CEO Marc Benioff told me in late August that the company is on the verge of launching AI-powered digital agents that can help companies automate customer service. Salesforce will charge for conversational usage, Benioff says.

Meanwhile, AMD ( AMD ) President and CEO Dr. Lisa Su took the wraps off a slew of new AI chips by 2026 in an interview at today’s conference.

“AI is a much bigger cycle than I would have expected five years ago,” Su said.

To be sure, tech stocks could use a little magic right now.

The tech-rich Nasdaq Composite fell about 5 percent in September as investors took profits from hot AI trades amid fears of slowing economic growth. Investors were also worried about a slowdown in artificial intelligence spending, triggered in part by mixed second-quarter earnings from chip powerhouse Nvidia ( NVDA ) .

Nvidia is down 11% year to date, with AMD down 7%.

The story continues

“The recent performance (of Nvidia stock) has not been great, but we remain positive on the stock,” Goldman Sachs analyst Toshiya Hari told Yahoo Finance on the conference call. “First, demand for accelerated computing continues to be very strong. We tend to spend quite a bit of time on the hyperscalers – the Amazons ( AMZN ), the Googles ( GOOGL ), the Microsofts ( MSFT ) of the world – but you’re seeing a broadening of the demand profile in enterprises, even in sovereign states.”

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In the Opening Bid episode below, State Street Global Markets head of equity research Marija Veitname makes her case for overselling AI.

Brian Sozzi is the executive editor of Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and further LinkedIn. Advice on deals, mergers, activist situations or anything else? Email [email protected].

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