Many stock investors worried last year that rising interest rates and a weak macroeconomic backdrop would keep technology disruptive companies underperforming. This uncertainty has created a unique entry point for investors into the most interesting parts of the innovative technology ecosystem, especially software and semiconductors.
Excitement around generative artificial intelligence (AI) dominated U.S. stock market sentiment and wealth creation in 2023.The Biggest Winner Was the ‘Magnificent Seven’ Tech Stocks — Apple
AAPL
,
microsoft
MSFT
,
alphabet
Google
,
Amazon.com
AMZN
,
Nvidia
NVDA
,
meta platform
meta
and tesla
TSLA
This has led to significant stock price gains, driving 70% of the absolute performance of the Nasdaq Composite Index COMP last year. This price-to-earnings ratio is not only unusual, it’s not surprising. His earnings per share for these companies increased by at least 50%.
Small-cap tech stocks haven’t fared as well. Over the past two years, the MSCI ACWI Global Small Cap Tech Index has fallen 5% due to pressure on multiples from weak spending and rising interest rates. Global information technology (IT) spending growth was below the long-term average, at 2.9% in 2022 and 3.5% in 2023, putting the technology sector below its normalization trajectory.
Small-cap tech multiples also came under pressure as the 10-year Treasury rate BX:TMUBMUSD10Y rose from 1.6% at the beginning of 2022 to 3.9% at the end of 2023. Yet by 2024, the growth rate of global IT spending could more than double. As we near the end of the Fed’s rate hike cycle, pressure on the multiple should ease.
Against this backdrop, market leadership may change. Investors should pay close attention to stocks that have surpassed the Magnificent Seven.
Valuations are particularly attractive in the software industry, where the gap between the fastest and slowest growing companies remains strikingly narrow. There is a great opportunity for investors to invest in the most disruptive parts of the market at a reasonable price.
The pipeline is built for multiple companies across a variety of industries and applications, including next-generation data storage, cybersecurity, and software development tools. With the improving consumer environment and interest rate easing, the beneficiaries of AI are expected to expand beyond the Magnificent Seven. Innovation is accelerating rapidly, and companies are developing new solutions, products, and applications that have the potential to accelerate growth.
Investors seeking exposure to AI opportunities may want to focus on three specific areas:
AI enablers: Cloud providers and semiconductor and semiconductor capital equipment manufacturers needed help training large-scale language models (LLMs). It could benefit disproportionately from the huge demand and investment in cloud vendors and building AI data centers, which could accelerate fundamentals.
Data and security: A software company that fine-tunes and secures vast amounts of data stored in the cloud for AI models. As companies digitize their infrastructure and overlay their own LLMs or leverage external LLMs, the demand for data management can skyrocket.
application: Software and other companies in a variety of sectors that make extensive use of AI. As AI products and services become more specialized and domain-specific, demand for enterprise software and innovative consumer internet companies should re-accelerate.
There are a variety of opportunities to invest in companies that have the potential to participate in changes in technology industry leadership. Here are some tech stocks we own as part of Goldman Sachs Asset Management’s portfolio that could benefit from these growth trends in 2024.
AMD
AMD
: In 2023, nearly 100% of AI processing was done on Nvidia graphics processing units (GPUs), but other semiconductor players are expected to gain GPU market share in 2024. With his new MI300 chip, AMD (Advanced Micro Devices) seems to be on a roll. -Positioned.
Micron Technology Co., Ltd.
Mu
): AI processing requires significantly more onboard memory. Micron is an emerging leader in HBM (High Bandwidth Memory) and is expected to see significant acceleration in fundamentals in 2024.
mercadolibre
Meri
): Latin America’s ‘Amazon.com’ is expected to continue increasing its market share across e-commerce and digital payments.
hubspot
hub
: A leading provider of sales and marketing tools for small and medium-sized businesses (SMBs). As spending recovers cyclically in 2024, HubSpot should benefit from the new generation of his AI capabilities in its products.
Goldman Sachs Asset Management currently owns each of these four stocks. For investors, given the acceleration and pace of industry disruption, it is important to consider future investments in technology that can lead to potential wealth creation opportunities.
Sung Cho is co-head of technology investing in fundamental equities at Goldman Sachs Asset Management.
more: AI hype around ‘Magnificent 7’ stock is latest example of ‘massive market delusion’
Also read: Are there too many “Magnificent 7”? Income-weighted index funds may be the solution.