Following a bumpy start to 2026 for AI-related trading, Goldman Sachs suggests that mega-cap technology stocks, which have underperformed due to market rotation, could stage a comeback later this year.
The "Magnificent Seven" stocks, previously core drivers of the AI trade, have recently lagged behind the S&P 500. While Goldman Sachs anticipates that AI-driven profits will continue to spread from the very largest companies to a broader market, analysts point to three potential catalysts that could reactivate the market leadership of Meta Platforms, Inc. (META), Microsoft (MSFT), Amazon (AMZN), and Alphabet (GOOG) in the second half of 2026.
Analysts stated, "In the near term, performance divergence among the hyperscale cloud providers is expected to persist. However, we identify three catalysts that could signal an inflection point later this year."
Accelerating AI Revenue Growth An increase in company-disclosed AI-related revenue would help alleviate market concerns about excessive spending. "An acceleration in AI-related revenue growth would strengthen investor confidence in the eventual return on sustained investment spending and the long-term profit potential of hyperscale cloud providers," the analysts said. They added that growth in AI revenue would also provide investors with visibility into the path to AI monetization, justifying the substantial investments. Goldman Sachs noted that the latest round of earnings from major tech companies already reflected this dynamic. All hyperscale cloud providers raised their capital expenditure forecasts, yet the stock price reactions varied significantly. Microsoft declined due to weak cloud growth, Amazon fell after providing sales guidance that was merely in line with expectations, while Meta surged on strong revenue forecasts and robust advertising performance.
Slowing AI Expenditure Growth Goldman Sachs projects that the growth rate of AI capital expenditures will peak in 2026 before moderating. This slowdown is expected to allow investors to better assess companies' profit potential. Currently, spending by hyperscale cloud providers is projected to reach 92% of their cash flow from operations, a level exceeding that seen during the dot-com bubble era. "A moderation in capital expenditure growth will provide investors with a visible path to a bottoming in free cash flow, thereby aiding in the re-rating of these companies based on profitability," analysts commented.
Weakening Momentum in Cyclical Stocks The stock market has experienced a rotation away from technology shares toward cyclical stocks. Recent concerns about AI's impact on reshaping the global economy have unsettled the dominance of traditional tech leaders. "A shift in the macroeconomic environment from accelerating growth to moderating growth should prompt investors to seek opportunities again in structural growth stocks," the analysts suggested. Goldman Sachs economists expect the U.S. economy to maintain growth in the first half of the year, supporting cyclical stocks that are typically less correlated with AI. They forecast that these pro-growth tailwinds will peak around mid-year and begin to decelerate in the second half of 2026.
Comments