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The New AI Trades
- Investors may have priced software stocks for 5% to 10% growth, though the sustainability of these valuations regarding AI disruption remains uncertain, with selling pressure anticipated to persist in publishing, advertising, media, legal services, IT consulting, and insurance.
- Portfolio repositioning is currently driven by valuation concerns, with the assessment of AI adoption efficacy and terminal value questions expected to be a multi-year debate rather than resolved within one or two quarters.
- Software stock price recovery is contingent on earnings estimates stabilizing, mirroring historical patterns observed in the newspaper and tobacco sectors, creating tension between near-term fundamental strength and uncertain long-term assumptions.
- Analysts anticipate earnings will be the primary driver for the software space and broader S&P 500 over the next several quarters, with fourth-quarter large-cap U.S. earnings growth expected to reach approximately 12% and median S&P 500 earnings growth around 9%.
- Five large public U.S. hyperscalers are projected to see capital expenditure growth rates accelerate to 60% in 2026, an increase from 35% at the start of the year, with further upward revisions considered probable.
- Companies face potential cash flow pressure as 2026 capital expenditure levels reach roughly 90% of cash flows from operations, likely leading to increased debt issuance and reduced share buybacks.
- The U.S. economy is forecast to accelerate in the first part of 2026 due to fading tariff headwinds and supportive financial and fiscal policy tailwinds.
- Cyclical sectors including consumer discretionary, transports, and industrials are expected to drive market higher conditions if the macro environment remains favorable, alongside continued demand for performance dispersion in AI-centric stocks.
- Goldman Sachs anticipates further upside for the S&P 500, though return magnitude is expected to slow relative to previous years, with index multiples remaining flat around current levels.
- The market outlook is supported by strong corporate and consumer balance sheets, healthy earnings growth extending beyond the AI trade, and a dynamic S&P 500 composition with frequent entry and exit of top companies, despite concerns over high valuations and market concentration.