Goldman Sachs issues a warning to AI stock investors

Goldman Sachs is sounding an early alarm bell on the near-term direction of hot AI stocks.

“Our discussions with investors and recent equity performance reveal limited appetite for companies with potential AI-enabled revenues as investors grapple with whether AI is a threat or opportunity for many companies. While we expect the AI trade will eventually transition to Phase 3, investors will likely require evidence of a tangible impact on near-term earnings to embrace these stocks. Unlike Phase 2, there will likely be winners and losers within Phase 3,” Goldman Sachs US equity strategist Ryan Hammond wrote in a new note on Friday.

Hammond thinks AI investment as a percentage of capital expenditures could be nearing a climax. In turn, that sets the stage for overly upbeat AI investors to be let down if earnings don’t come in strongly in future quarters.

Hammond added, “Investors increasingly ask us whether current US equity prices are reflective of overly optimistic investor expectations.”

Hammond’s valuation concerns are of interest in light of fresh pressure in AI stocks. It all began late last week with Nvidia (NVDA), as investors reassessed the company’s quarter and outlook. Shares are down 6% in the past five trading sessions.

Salesforce (CRM) and Figma (FIG) got drilled on Thursday after their earnings reports didn’t wow. It’s clear that the hype on their earnings calls wasn’t enough to paper over soft areas of the earnings reports. Growing concern on the Street centers around the pace of AI demand by corporations, given what looks to be a slowing US economy.

“In this market out there, where you have companies trading at 100 times revenue, you have companies trading at half-trillion-dollar valuations that lose $10 billion a year, I mean, a lot of these valuations are crazy,” C3.AI (AI) founder and executive chair Stephen Ehikian said on Yahoo Finance’s Opening Bid (video above).

If there is any reassuring tone from Hammond on the AI trade, it’s that valuations don’t appear to be in bubble territory. That may limit downside risk if earnings growth doesn’t live up to expectations, though Hammond does call out outsized valuations on AI names such as Tesla (TSLA) and Palantir (PLTR).

“Implied market pricing of long-term S&P 500 earnings growth and the valuations of the largest TMT [tech, media, telecom] stocks are both modestly above their respective historical averages but remain well below the levels reached in the Tech Bubble and 2021,” Hammond wrote.