The New AI Trades

Episode Summary

Executive Summary: Goldman Sachs strategist Ryan Hammond says the sharp selloff in software and adjacent data-services stocks reflects rising AI disruption fears, but fundamentals still matter most. He argues the market is rotating beyond mega-cap growth into cyclicals, while the broader bull market can continue if earnings stay strong—even as future gains likely slow and become more dispersed.

Main Topics: Software stock derating amid AI disruption fears (Priority: 5/5): Software stocks fell sharply as investors reassessed growth durability and terminal value in light of new AI tools that can automate or replace parts of these businesses. AI disruption spreading beyond software (Priority: 5/5): Selloffs extended into publishing, advertising, media, legal services, IT consulting, and insurance, suggesting industry-specific AI applications are now affecting multiple service sectors. Historical analogs: disruption episodes and earnings (Priority: 4/5): Goldman compares the current selloff to newspapers in the 2000s and tobacco in the 1990s, concluding that earnings stabilization—not valuation alone—typically marks a bottom. AI capex boom and monetization dispersion (Priority: 5/5): Hyperscalers are spending heavily on AI infrastructure, but stock reactions differ widely because investors are focusing on whether capex translates into revenues and earnings. Broader market broadening and cyclical rotation (Priority: 4/5): The market is shifting toward non-U.S. stocks, small caps, and cyclicals as economic growth is expected to accelerate and breadth improves under a friendlier macro backdrop. Bull market outlook: upside remains, but returns slow (Priority: 4/5): Goldman sees further S&P 500 upside supported by earnings, but high valuations and concentration mean gains should be smaller than in recent years.

Key Arguments: Software stocks were trading as if investors expected 15-20% growth, but recent price action suggests the market now expects only 5-10% growth. AI disruption risk is no longer theoretical; specific product launches are triggering sector-by-sector repricing in real time. The key question for equities is not just current earnings, but the discounted value of long-term terminal cash flows. Historically, disrupted sectors bottomed when earnings estimates stabilized, not simply when prices became cheaper. AI-related capex is rising substantially, but investors are rewarding companies only when they can show clear monetization in cloud, ads, or other core businesses. The AI trade is becoming more dispersed, with winners and losers within the same group rather than a single rising tide. Current market broadening reflects both rotation out of prior leaders and a macro setup that favors cyclicals. The S&P 500 can still rise, but higher starting valuations imply smaller future returns and a greater dependence on earnings growth.

Data Points: Software stocks YTD performance: down about 25% - Ryan describes the sector's decline to start the year Software stocks from October highs: down more than 30% - Shows the scale of the drawdown from prior peaks Forward earnings multiple (software) before selloff: about 35x - Valuation level a couple of weeks earlier Forward earnings multiple (software) now: about 20x - Current valuation after derating Valuation premium vs rest of market before: more than 100% - Software stocks previously traded at a large premium Valuation premium vs rest of market now: about 20% - Current premium after repricing Growth expectation implied by market before: 15% to 20% - Investor growth assumptions embedded in software valuations Growth expectation implied by market now: 5% to 10% - Market's implied growth outlook after selloff Large U.S. hyperscaler capex last year: about $400 billion - Baseline AI infrastructure spending Analyst capex expectation at start of 2026: about $540 billion - Initial forecast for hyperscaler spending Revised capex expectation after earnings season: about $660 billion - Upward revision after company guidance Incremental capex revision: $120 billion - Increase in expected spending over a few weeks 2026 capex growth rate at start of year: 35% - Analyst expectation before revisions 2026 capex growth rate after revisions: 60% - Updated growth rate in spending expectations Capex as share of operating cash flow: about 90% - Expected level in 2026 based on forecasts S&P 500 Q4 earnings growth: about 12% - Index earnings are on track for double-digit growth Consecutive quarters of double-digit S&P 500 earnings growth: 4 - Recent earnings momentum for the index Median company Q4 earnings growth excluding largest firms: about 9% - Shows broad earnings health beyond mega-caps

Pivotal Quotes: "These stocks traded at high valuations and have been popular. For a long time. Let's reposition our portfolios first and then start to work through some of the questions later." — Ryan Hammond: Explains why investors are selling first and asking AI-disruption questions later "The defining word of the 2026 market so far has been broadening." — Ryan Hammond: Summarizes the shift toward greater market breadth and rotation "The hard part is the long-term earnings outlook may be under more pressure, right?" — Ryan Hammond: Captures the tension between near-term resilience and long-term uncertainty

Implications: Investors should expect continued volatility and dispersion, especially in AI-exposed sectors. Earnings quality and AI monetization will matter more than broad thematic enthusiasm, while the bull market can continue if growth and profits stay firm.