Goldman Sachs Urges Selective AI Buying After Record Hedge Fund Selling
TREE NEWS reports: Hedge funds have slashed their exposure to AI-related stocks at a record pace, prompting Goldman Sachs to recommend a selective approach to buying the dip. The bank’s prime brokerage data shows the largest single-day selloff in technology shares since September 2024, with its VIP basket of hedge fund favorites posting its worst daily performance since 2011. The retreat comes as investors reassess the soaring capital expenditures required for AI infrastructure and the uncertain returns on those investments.
Market Implications
The selloff has been concentrated in AI darlings, while the broader market has held up relatively well. On Thursday, the Philadelphia Semiconductor Index plunged 6.7%, yet 337 S&P 500 constituents advanced and the index fell only 1.2%. The S&P 500 ex-AI index has gained 6.5% in October, on track for its best month in nearly three years, marking the first time this year that non-AI stocks have outperformed the overall index. This rotation signals that investors are no longer willing to pay a blanket premium for AI exposure.
Goldman’s strategists acknowledge that positioning has cleared significantly—net leverage among fundamental long/short funds has fallen to the 1st percentile of the past three years—but they caution that momentum exposure remains elevated at the 73rd percentile. The bank’s AI beneficiaries basket has tumbled 55% from its June peak, and its high-beta momentum basket has given back all of its year-to-date gains. While some assets may offer better risk-reward after the correction, the firm stops short of calling a bottom for the entire sector.
The core debate centers on whether AI spending will translate into sufficient cash flow. Meta Platforms raised its 2026 capital expenditure guidance to at least $135 billion, sending its shares down 7% on Thursday despite beating revenue expectations. This reaction underscores that investors are now demanding proof of returns, not just growth. Goldman notes that earnings estimates for hyperscalers have remained stable since July, providing a fundamental anchor, but the lack of clarity on return on investment keeps the outlook uncertain.
Key Takeaways for Investors
- Selectivity is crucial: Goldman recommends a targeted approach to AI assets, focusing on companies with stable earnings expectations and avoiding cyclical or low-quality names.
- Positioning has cleared but not normalized: While hedge fund selling has been intense, momentum exposure remains historically high, suggesting further volatility is possible.
- Earnings stability is the key support: Hyperscaler profit forecasts have not been revised lower, which could provide a floor for some AI stocks if market sentiment stabilizes.
- Watch upcoming earnings: Microsoft, Alphabet, and Amazon report next week, offering critical evidence on whether AI investments are generating adequate returns.
- Capital costs remain unresolved: The market has a path to solving power demand, but the cost of capital and the timeline for returns are still open questions.
As the AI trade matures, the easy money has likely been made. Investors should focus on companies that can demonstrate tangible returns on their AI investments, rather than betting on a broad sector rebound.
