As the AI-driven market rally enters a phase of high volatility, the question arises: should investors still buy tech stocks in the second half of the year? Goldman Sachs' answer remains affirmative, but with a shift in focus from broad sector bets to selective company picking.
In a recently published report, Goldman Sachs notes there are no signs yet of the current AI-driven technology cycle peaking. Signals indicating supply surpassing demand or a slowdown in technological advancement have not materialized. The firm's analysts believe this cycle has the potential to become one of the largest and longest-lasting tech upcycles in history. While some profit-taking emerged in related stocks entering July, the report characterizes this as a healthy correction following rapid price appreciation, not a trend reversal.
Core Investment Themes for Stock Selection
The report outlines three key themes for stock selection. The first is to maintain a bullish stance on AI server and data center-related hardware stocks. The second is to apply a more nuanced assessment of risk and reward for individual stocks in subsectors where supply and demand are already tightening. The third is to focus on software and IT services companies that are leveraging the AI disruption wave to open new business opportunities as a defensive play, particularly when market risk appetite declines.
AI Cycle Remains Intact, Corrections Are Healthy
Goldman Sachs maintains its overall bullish view on the Asian AI supply chain. The report states that two primary signals indicate a tech cycle is nearing its end: a shift from semiconductor and electronic component shortages to oversupply, and a slowdown in technological innovation where competition reverts to being price-driven rather than performance-driven. Currently, neither signal is present.
The firm believes investment in AI infrastructure is still in an expansion phase. Future applications like physical AI and edge AI are expected to follow the current wave of AI server and data center construction, further extending this technology cycle. Therefore, recent profit-taking in related stocks should be viewed more as a healthy pullback after a sharp rally rather than a fundamental deterioration. Meanwhile, supply-demand tightness is gradually spreading from hot areas like memory and optical communications to more semiconductor subsectors, indicating a broadening of industry strength.
Investment Focus Shifts from Sectors to Individual Stocks
Following significant gains in many AI-beneficiary sectors, Goldman Sachs believes the investment logic for the second half will gradually shift from "getting the sector right" to "selecting the right company." The report suggests that companies worth watching typically share several characteristics: they can directly benefit from rising product prices; possess strong capacity expansion capabilities to capture profit opportunities from tight supply; have AI-related growth potential not yet fully reflected in their valuations; or possess unique catalysts the market has not adequately priced.
In other words, after a broad-based valuation re-rating, future excess returns are likely to come more from a company's own competitive strengths rather than from general sector momentum.
Defensive Strategy Pivots to AI Applications
Beyond continuing to allocate to AI hardware, Goldman Sachs proposes a new defensive approach. The report suggests that when market risk appetite wanes, instead of avoiding the tech sector, investors should focus on software, IT services, and internet companies that are using AI to create new business opportunities. Goldman points out that generative AI is spurring new enterprise service demands in areas like AI consulting, data infrastructure build-out, and cybersecurity. Some software and IT services companies may see their profitability benefit from AI tools that enhance development efficiency and reduce costs.
Concurrently, earlier market concerns that AI would devalue content are easing. Goldman believes AI is more likely to serve as a new tool for enhancing commercialization and improving operational efficiency, rather than simply replacing existing businesses. Consequently, the growth narrative for some internet and digital content companies is improving.
Overall, Goldman Sachs contends that Asian tech investment for the second half should still adhere to the AI theme, but with a more balanced allocation approach. The offensive side should continue to focus on AI infrastructure and hardware supply chains with sustained improving fundamentals. The defensive side should look to software and IT services firms that can leverage AI to create new demand and boost efficiency, aiming to balance growth and defensiveness in an environment of increasing market volatility.
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