Goldman Sachs expects the AI trade to continue sooner rather than later

Investing.com -- Goldman Sachs (NYSE:GS) expects the AI trade to regain momentum sooner rather than later, despite recent market volatility that has weighed on AI-exposed equities.

Macroeconomic concerns and positioning unwinds have weighed on AI-related stocks, with Nvidia (NASDAQ:NVDA), a key Phase 1 name in Goldman’s AI trade framework, falling 21% since the S&P 500’s peak on February 19.

AI infrastructure stocks (Phase 2) and AI-enabled revenue stocks (Phase 3) have also underperformed, down 14% and 12%, respectively. But despite the short-term jitters, Goldman remains optimistic about the AI trade’s overall trajectory.

"We expect continued technological progress and earnings growth will lead investors to eventually reengage with AI stocks," strategists led by Ryan Hammond wrote.

They believe that Phase 3 stocks, which generate revenue from AI applications, offer a more attractive risk-reward proposition compared to infrastructure stocks in Phase 2.

"Even after the sell-off, the relative valuation of AI Phase 2 stocks is still slightly above its historical average, while AI Phase 3 stocks trade slightly inexpensive vs. history," strategists noted.

Of the 40 Phase 3 stocks that Goldman covers, 27 are Software (ETR:SOWGn) companies. Stocks that the firm expects to see the fastest sales growth over the next two years are Palantir Technologies Inc (NASDAQ:PLTR), Cloudflare Inc (NYSE:NET), SentinelOne Inc (NYSE:S), and Gitlab Inc (NASDAQ:GTLB).

A key driver for AI-exposed stocks will be broader adoption of AI technologies across industries. While Goldman’s Phase 4 basket, which tracks companies benefiting from AI-driven productivity gains, remains unchanged, the firm highlighted early adopters that are already seeing tangible benefits.

Companies such as Amazon (NASDAQ:AMZN), Cognizant (NASDAQ:CTSH), and Walmart (NYSE:WMT) have identified AI-driven efficiency improvements in areas including customer support, coding, and supply chain management.

Investor sentiment and economic data will also play a key role in determining when AI stocks recover.

Goldman’s Sentiment Indicator, a contrarian gauge of positioning, remains above "trough" levels seen in past market corrections, suggesting that further downside could be needed before a rebound.

“We expect growth data will be key for the path of US equities and Friday’s jobs report will represent a major test. Alternatively, the equity market would benefit from an easing of tariff policy, but uncertainty remains high,” strategists added.

“However, we expect continued technological progress and earnings growth will lead investors to eventually reengage with AI stocks and we continue to believe that AI Phase 3 offers better risk/reward for new capital than AI Phase 2,” they concluded.