Has The AI Bubble Officially Burst?

You’ll never guess who has turned bearish on AI? It seems one of the most prestigious names on Wall Street, Goldman Sachs, has done a U-turn and is betting against a continuation of the momentum previously seen in artificial intelligence stocks.

While Goldman has a long history of staying bullish, often for too long, and to their peril, which necessitated Warren Buffett stepping in back in 2008, they also have a remarkable track record of trading.

In a surprise event, their Chief Economist Jan Hatzius increased the probability of a recession occurring over the next 12 months to 25%. Previously, Goldman had the figure closer to just 10%. Historically, Goldman has had its pulse on when recessions will occur and this move suggests real caution is warranted. Or in other words, the pullback in early August may not be a dip before a bounce. So, what should you do?

Key Points

• • Goldman Sachs has shifted from a bullish stance, raising its recession forecast from 10% to 25%.
  • Goldman’s Thematic desk recommends hedging against uncertainties in AI, geopolitics, and the economy.
  • It appears concerned that AI and momentum stocks are likely to underperform relative to value stocks.

How To Trade The Goldman Outlook?

For the first time in a long time, Goldman’s Thematic desk advised clients how to hedge against a market correction and issued a short trade recommendation accordingly. What’s perhaps more remarkable is that the recommendation is based around uncertainties in AI, as well as concerns of geopolitics, the economy and upcoming Presidential election.

In a twist, Goldman focused on selling momentum but as any analyst worth their salt knows, momentum over the past year can be virtually interchanged with the Magnificent 7 stocks, and AI in particular given NVIDIA’s dramatic rise.

It seems that the premier bank on Wall Street has a view that AI is overvalued and the recent correction is just the beginning of something much worse from the bulls perspective. So, while AI and the Magnificent 7 have largely shook off any bears attempting to claw at them over the past year, a tectonic shift to favor the bears has taken place.

Is Goldman Right?

Goldman’s view that momentum is likely to underperform can be interpreted two ways. The first is, because momentum and AI are correlated, mega-cap stocks may well be in trouble while value stocks that are inversely correlated to momentum may be a harbor of safety.

Whether they are right, the reality for traders now is volatility is high and top traders tend to shun spiky and choppy moves in favor of predictable trends.

If you’re trying to figure out which way the trend is headed, you don’t need to look much further than the charts of Apple, NVIDIA and its cohort of Magnificent 7 stocks. They still lean bearish, and until that changes, it appears Goldman’s view may well be correct.

As any good trader knows, though, when the trend changes are confirmed and back to bullish, it’s best to switch on a dime.