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Goldman Sachs: Funds Flee Big Tech, Bet on AI Chips

Key Points

  • Investors are moving away from the "Magnificent Seven" tech giants, favoring AI upstream sectors like semiconductors.
  • Options market data shows higher hedging costs for Nasdaq ETFs compared to small-cap stocks, indicating risk aversion.
  • Goldman Sachs CEO believes the AI boom will continue to drive the market as long as confidence holds.
  • Goldman Sachs profited $17 billion last year from AI-related trading volatility.

The Great Rotation: From Big Tech to AI Infrastructure

Goldman Sachs' derivatives expert Brian Garret has a clear message for the second half of the year: the love affair with the "Magnificent Seven" tech stocks is cooling off. Instead, money is flowing into sectors that directly benefit from the AI boom—think semiconductors and other upstream players.

Why the shift? For one, the seven tech giants have been underperforming the broader market lately. Add to that growing concerns that their massive AI investments aren't translating into profits fast enough, and you have a recipe for institutional caution. Many funds are now underweight these mega-cap stocks, a trend that could persist unless we see stronger profit growth from data center businesses.

Options Market Speaks: Risk-Off for Tech

The options market is telling a similar story. The cost of downside protection for the Invesco QQQ Trust, which tracks the Nasdaq, has jumped significantly compared to hedging costs for small-cap stocks. That's a clear sign that investors are more worried about a tech downturn than a broader market slump. Goldman Sachs notes that only a dramatic improvement in data center profitability could reverse this sentiment.

Goldman's CEO: AI Boom Still Has Legs

Despite the cautious stance on big tech, Goldman Sachs' CEO remains optimistic about AI's market impact. In June, he stated that as long as market confidence holds, the AI rally will continue to lift stocks. And Goldman is certainly riding that wave: last year, the bank raked in $17 billion in profits, fueled by AI-driven volatility and related trading demand. Analysts expect another strong year ahead.

What This Means for Investors

So, where should you put your money? The message from Goldman is clear: look beyond the usual suspects. While the Magnificent Seven may struggle in the near term, the companies building the infrastructure for AI—chipmakers, data center operators, and networking firms—are where the action is. But as always, keep an eye on valuations and earnings. The AI boom is real, but it's not without its bumps.