Goldman Sachs trader Peter Callahan stated that investors are currently more inclined towards the top growth stocks in the industry. The profit prospects of Mag 7 are stabilizing but still have uncertainties, while chip stocks/AI stocks are experiencing an equally if not better market environment than in June this year.
Since the beginning of this year, US technology stocks have been fluctuating upwards.$NASDAQ 100 Index (.NDX.US)$They have alternated between rising and falling for 7 consecutive trading days, showing signs of stabilization.
This week, technology stocks will also see many catalysts: US September CPI,$Tesla (TSLA.US)$robotaxi day, $Advanced Micro Devices (AMD.US)$ How will the future trend of the Advancing AI Conference be? Goldman Sachs' top technology strategist Peter Callahan recently released research reports, answering ten questions that investors are focusing on.
Q1: What are the reasons for the underperformance of Microsoft's stock price?
$Microsoft (MSFT.US)$ The cumulative increase since the beginning of this year slightly exceeds 10%, ranking second to last in the Mag 7; in the past 11 trading days, Microsoft's stock price has fallen on 9 trading days.
Callahan believes that the "best" explanation for Microsoft's sluggish performance is that in the past few quarters, the company's earnings per share have not been upwardly revised. This is mainly due to:
1) Investors are concerned due to the stagnant growth of Azure cloud business;
2) The company lowered the guidance for the revenue growth rate of the Intelligent Cloud business for the 2025 fiscal year;
3) Investors are reevaluating the application prospects of copilot.
Q2: Are investors more inclined towards vertical type growth stocks?
With growth stocks finding it difficult to sustain bids, the broader horizontal type growth stocks have weakened. Currently, investors seem to be more inclined towards industry-leading vertical type growth stocks.
Generally speaking, horizontal type growth stocks refer to companies with a broader scope, while vertical type growth stocks are companies that focus deeply in a specific vertical sector.
Research reports suggest that the performance differentiation of growth stock assets has always been a focus of investors. In fact, the current EV/FCF premium of vertical type growth stocks is about 10 times higher compared to horizontal type growth stocks, mainly due to the market valuing their proprietary data moat and sector specificity.
Q3: Why has Salesforce's stock price outperformed Workday's?
In the past approximately one month, $Salesforce (CRM.US)$ cumulative increase of $Workday (WDAY.US)$ Trading more than 20% above.
Goldman Sachs pointed out that, in addition to the "positioning" factor, the price difference between the two is more driven by "narrative" rather than fundamentals.
The report stated that Salesforce is increasingly shifting towards the "Agents" product cycle, which may achieve significant growth in the 2025 fiscal year and beyond. Analysis shows that Workday's forward P/E ratio is only three times that of Salesforce, indicating strong market bullish sentiment towards the latter.
Will there be any changes for Q4: Mag 7 in 2025?
The research report indicates that although the profit prospects of Mag 7 remain stable, confidence in some of the companies within it is still not fully established.
Mainly including: $Microsoft (MSFT.US)$ lacking the drive of eps correction $Apple (AAPL.US)$ compared to the catalyst of iPhone 17, the valuation will be more reasonable in a year$NVIDIA (NVDA.US)$investors worry about the stock price peaking $Alphabet-A (GOOGL.US)$ regulatory concerns and potential risks driven by AI
Q5: How long will the market rotation continue between 'low volatility' or 'defensive'?
Callahan believes that although the market is full of uncertainties, the key is whether investors believe the market will shift to a cyclical market.
The report indicates that considering the overall improvement in data, from now until the election, it is necessary to be more vigilant than usual against various squeezing factors, but everything may return to normal afterwards. Callahan also adds that everything still depends on economic data.
Q6: How do you view the rise of A-shares and Chinese internet stocks?
The report states that currently, many investors still tend to remain cautious, not yet impacting the inflow of funds into US large cap tech stocks.
However, according to relevant data, the current rise in A-shares has pushed the forward P/E ratio of the MSCI China Index to 11.3 times. With continued policy efforts, valuations might expand to 12 times, indicating a total return potential of 15-18%.
Q7: Will Nvidia and the AI theme continue to be hot?
Since the summer, changes in investor sentiment and positioning regarding semiconductors and AI themes have been widely discussed.
Goldman Sachs believes that semiconductor/AI companies are worth close market attention from now until the end of 2024 to 2025. Considering that current investor positioning is clearer and the market background is more favorable (global central banks entering an easing cycle, data centers beginning widespread recovery, continued strong investments in AI, etc.), the current market environment for these companies might be as favorable as it was in June 2024, or possibly even better.
Why is Live Nation Entertainment performing well?
The research report points out that recently the performance of leading companies in the industry has been quite good, such as$Duolingo (DUOL.US)$,$Netflix (NFLX.US)$etc.
In addition, part of the optimism towards Live Nation can be attributed to the uniqueness of its products, such as the scarcity of artist tours, which may lead to higher consumer demand for their products.
How to view the growth potential of top internet companies like Netflix, Meta, and Duolingo?
Goldman Sachs believes that the market is rewarding the scarcity of 'clean growth' (referring to sustainable and eco-friendly growth), and that the market is shifting towards evaluating companies from the framework of the 2026 fiscal year.
From this perspective, it is difficult to find investors with too many negative views on these leading internet companies. However, considering that the market environment will become more complex starting in the fourth quarter (including geopolitical risks, Christmas holidays, the U.S. elections, etc.), discussions around these companies will start to diverge.
Callahan believes that if the company's financial report is released close to the election time, it may limit the momentum of the stock price rise after the financial report is disclosed.
Q10: How to trade cyclical stocks around earnings?
Callahan believes that, given the 'buy on rate cut' trades and the continued improving macro backdrop, it might be more difficult to put bearish bets on cyclical stocks.
Editor/Rocky