Banking titans JPMorgan Chase and Goldman Sachs say the AI trade is not broken, but it is changing, following the correction in tech witnessed in the last few weeks.
In a new report titled Software Shock: AI’s Broken Logic, JPMorgan says the long-term case for artificial intelligence remains intact even as volatility shakes tech-heavy portfolios.
The bank says the turbulence is part of a broader transition, not the end of the theme.
“The macro thesis of AI stands. It’s going to change the productivity landscape, and the companies that lean into it will be rewarded in the long run. But more bouts of volatility are likely as the technology itself continues to leapfrog previous generations, and as long as portfolios remain so skewed to tech.”
JPMorgan says moving forward, it is looking at monetization as one of the central investment themes powering the Mag 7 names.
“Disruption can have painful consequences, but the revenue opportunity and productivity gains will be worth it. Keep the focus on the large-cap leaders that are likely to see a strong return on their AI investments, as well as the chipmakers and commodity-related players in the AI supply chain. They’ve been swept up in the software sell-off for now, but they are most likely to benefit in the long term.”
Goldman Sachs is seeing a similar shift beneath the surface of the Mag 7 names.
In a recent video update, Goldman Sachs Research analyst Ryan Hammond says investors are no longer rewarding AI spending automatically. Instead, markets are scrutinizing whether capital expenditures are translating into real earnings.
“You saw all of these companies saw their CapEx numbers go up, but you saw some stocks go up 10%, some stocks go down 10%, and some stocks basically stay flat on the day of the announcements.
So why is that?
To us, that’s because investors are taking a closer look at monetization of AI and the fundamentals of the underlying business. So if a company was able to message to investors that they are monetizing AI, that could be through their cloud business, that could be through their ad business, then those stocks responded favorably because investors have confidence in the return on that investment. If you saw some pressure in those estimates for those businesses or their sales or earnings, then you saw those companies come down.”
Hammond also says the result is likely to be greater divergence within big tech rather than a single bloc driving the index.
“And so, to us, it looks like the group is just going to have a lot more dispersion within the group. No longer is it going to be one big group of stocks powering the index higher. You will see periods where some stocks are doing better or worse than others. And again, for us, it’s really how is CapEx translating into revenues and earnings for these companies, I think that will determine which stocks are benefiting from this the most.”
Together, the two banks suggest the next phase of the AI rally may hinge less on spending headlines and more on proof of profits.
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