Goldman Sachs top traders: US stock AI stocks are a "tactical pullback," not a "major adjustment"

Goldman Sachs believes that the recent significant pullback in AI-related stocks is more of a "tactical breather" for the market, rather than signaling the beginning of a broader deep adjustment.

On August 25, Goldman Sachs' top technology trader Peter Callahan stated that regarding the recent pullback in AI-related stocks, most investors have indicated it is merely a tactical adjustment, not a substantial pullback similar to that of spring 2025 or summer 2024.

So far this month, Goldman Sachs has observed that a basket of AI stocks has underperformed the S&P 500 index by about 400 basis points.

Callahan attributed this pullback to several factors:

• The high valuations of AI stocks.
• Recent doubts about the return on investment and adoption rates for AI.
• At the same time, the macro environment is more favorable for cyclical stocks.

Market attention is focused on Nvidia's developments this week. Meanwhile, the flow of funds at the institutional level shows a complex picture: hedge funds are increasing their holdings in tech giants, while large mutual funds are exacerbating their underweight trend.

Institutional Positioning Divergence: Hedge Funds Increasing Holdings vs. Mutual Funds Underweight

As AI concept stocks experience a pullback, the strategic divergence among institutional investors is becoming increasingly evident.

Hedge funds reversed their investment strategy towards the seven tech giants in the second quarter. After reducing their holdings for most of the past two years, hedge funds have begun to increase their positions in this sector, primarily focusing on Nvidia, Amazon, Apple, and Tesla.

Data shows that the weight of the "seven tech giants" in hedge fund long portfolios has risen from 11.8% in the first quarter to 12.8% in the second quarter. Nvidia is the preferred choice among the seven tech giants, while Meta and Google have seen reductions in hedge fund positions.

In contrast, large mutual funds have continued to expand their underweight position in the seven tech giants. As of the beginning of the third quarter, these funds' underweight extent reached 819 basis points, up from 723 basis points at the beginning of the second quarter.

This strategy has become a factor dragging down fund performance in the recent rebound of tech stocks. Additionally, after META, Google, and Amazon were included in the Russell 1000 Value Index, value funds currently also show a slight underweight status towards the overall "seven tech giants."

"Software is Dead" Argument Questioned

In response to the pessimistic view circulating in the market that "software is dead," Goldman Sachs presented a rebuttal in a recent report.

This pessimistic view mainly argues that AI, as a disruptive force, will change the pricing model of the software industry, lower the entry barriers for new entrants, and ultimately compress the profit margins of leading SaaS companies.

However, Peter Callahan specifically mentioned a point in the report to counter this argument. The report noted that **historical experience shows that software vendors have the ability to capture 10% to 20% of the value generated from the productivity gains of their products **

Goldman Sachs' analysis concludes that as long as software products can maintain their differentiated advantages, the overall market size for application software will expand over time rather than shrink.

This long-term perspective suggests that current industry concerns triggered by AI may be overstated, and the fundamentals of high-quality software companies remain solid, with any pullbacks potentially providing new opportunities for investors