Goldman Sachs says Wall Street is now treating AI like a defensive trade, despite continuing questions about whether artificial intelligence stocks are in a bubble.
Sean Tuteja, who oversees volatility trading for ETFs and custom baskets in Goldman Sachs’ global banking and markets division, said investors are returning to AI stocks as inflation concerns, high oil prices and slowing economic growth cloud the broader economic outlook.
“We’re seeing this massive rotation back to hyperscalers and AI names as people see demand becoming more inelastic and consumers being able to tolerate things they can’t tolerate,” Tuteya said on Goldman Sachs’ podcast “The Markets” published Friday.
The change marks a sharp reversal from the start of the year, when investors had expected falling inflation, Federal Reserve interest rate cuts and a strengthening business cycle to help sectors such as homebuilders, industrials and consumer stocks rally.
Instead, persistent inflation and geopolitical tensions are driving investors back into AI companies, which many see as more insulated from economic downturns than other markets.
The Nasdaq is up about 26%, and the Philadelphia Semiconductor Index is up more than 60% from its March lows.
Tuteja said the stock price rally is still driven by actual spending rather than pure speculation, noting that hyperscalers have pledged to spend about $755 billion in capital spending this year, up 38% from a year ago.
“The reason semiconductor profits are consistently higher is because so much capital investment is going into trade,” he said.
The next big AI deal
The consumer boom is also prompting investors to explore the next stage of AI infrastructure deals beyond semiconductors, data centers, memory chips, and optical technology.
“Our Basket team believes that the next spin-off or next iteration of the AI equipment deal will be in the realm of liquid cooling,” Tuteja said, referring to systems that can significantly reduce the massive energy demands needed to cool traditional data centers.
Despite the optimism surrounding AI, Tuteja cautioned that investors may be underestimating how volatile trading will be, as leveraged products related to semiconductors can amplify market volatility.
“Things don’t just go up all the time. There can also be violent corrections. And we haven’t really seen that,” he said.
That doesn’t mean AI trade is in a bubble, he added.
“But that means there can be two-way volatility in the market,” he added.