Can the Tech Surge Continue?

Market Performance and Characteristics

• The NASDAQ has risen approximately 20% since March 30th lows, marking a near-historic rally in tech, though the rally exhibits narrow breadth with only about half of NASDAQ stocks participating.
• The sector has delivered high-velocity gains, driven primarily by semiconductors which are up nearly 80% year-to-date, representing their best annual performance since 1999.
• Multiples for AI stocks within the S&P 500 remain contained despite a 30% price rise, as earnings for that specific group have also grown by approximately 30%.
• Earnings revisions remain the primary anchor for the rally, ensuring valuation growth is supported by fundamental financial improvements.

Capital Expenditure and AI Infrastructure

• First-quarter results highlighted a renewed wave of capital expenditure (CapEx) revisions, with estimates for 2027 CapEx now projected to exceed $900 billion.
• Capital expenditure growth rates for 2027 are projected to reach approximately 20%, indicating the AI investment story remains intact.
• Semiconductor and AI infrastructure companies are securing orders with visibility extending into calendar 2027, driven by tight capacity and supply chain shortages.

Software Sector Dynamics

• Software earnings results were mixed in the first quarter, creating notable dispersion between leaders and laggards within the group.
• Market sentiment is shifting as investors distinguish between winners and losers, contrasting with the previous year's correlation-driven pricing.
• Current market re-rating depends on a company's demonstrated ability to deploy AI to drive faster revenue growth, specifically addressing fears of disintermediation.
• Private credit markets previously faced stress due to concerns over excessive software exposure, but recent software stock recovery has alleviated these pressures.
• Key investor debates center on subscription versus consumption business models and the competitive landscape between incumbents and startups.

U.S. Internet Sector and Macro Outlook

• The U.S. Internet sector is currently lagging the broader software cycle but shows signs of improvement due to product-side AI innovation.
• Consumer pressure is easing as oil prices have reset from their highs, potentially stabilizing the investment cycle and consumer health.
• Goldman Sachs expects to monitor the U.S. Internet sector closely for the remainder of the year given the cleaner positioning.
• Upcoming macro data drivers include Non-Farm Payrolls (NFP) and mid-month CPI reports, which will be scrutinized for the interplay between labor markets and inflation amidst geopolitical conflicts.
• The firm will monitor user conferences across software and semiconductor sectors to gauge sentiment on generative AI trends heading into the summer.

Valuation Risks and Forward-Looking Statements

• While short-term momentum dynamics suggest the sector may have moved "too fast, too far" following an 80% gain in five months, medium-term positioning remains supported by ongoing earnings revisions.
• Interest rates are not currently a primary concern for the tech sector, as investors are focused on the massive input costs and infrastructure challenges inherent to delivering AI capabilities.
• Future market comfort in the semiconductor sector relies on continued positive earnings revisions, which will likely facilitate buying on pullbacks or momentum unwinds.
• Goldman Sachs notes that past performance, including the 1999 semiconductor peak, does not guarantee future results, though the current cycle is distinguished by stronger earnings support.