Big Tech stocks have seen their fair share of turbulence in 2023, with the once-booming AI trade cooling off and the tech-heavy Nasdaq shedding around 5% in September. But according to Goldman Sachs’ veteran tech analyst Kash Rangan, the solution to reigniting tech stock growth lies in a “magic formula.”
So, what’s this formula? According to Rangan, the convergence of two powerful forces: a steady cut in interest rates from the Federal Reserve and a burst of innovation — particularly in artificial intelligence (AI).
Rate Cuts: The First Ingredient
The Federal Reserve’s next monetary policy decision, expected on September 18, has garnered significant attention from investors. After a series of aggressive rate hikes to combat inflation, the Fed is now signaling potential cuts. Goldman Sachs’ chief economist Jan Hatzius suggests that a 25 basis point cut seems most likely, though a more aggressive 50-point reduction isn’t off the table.
Rangan believes that lower interest rates will not only make borrowing cheaper but also set the stage for faster growth, especially in capital-intensive sectors like tech. But cutting rates alone won’t be enough — there’s another key component.
AI Innovation: The Catalyst for Growth
Rangan argues that for tech stocks to regain their previous momentum, the sector needs to innovate its way to higher earnings growth — aiming for a 20%-30% growth rate, up from the current 11%. AI is the most promising avenue for this growth, with companies like Microsoft, Salesforce, and AMD pushing the envelope in AI monetization and chip advancements.
Salesforce, for instance, is developing AI-powered digital agents that automate customer service interactions, providing a new revenue stream through usage-based pricing. Meanwhile, AMD’s CEO, Dr. Lisa Su, recently unveiled a series of advanced AI chips slated for release through 2026.
A Bumpy Ride for AI Stocks
Despite the excitement surrounding AI, the road hasn’t been smooth. Chip giant Nvidia, once the darling of the AI boom, has seen its stock fall by 11% this month, with AMD down 7%. Concerns over slowing economic growth and an AI spending slowdown have weighed on these companies, but analysts like Rangan remain optimistic.
“Demand for accelerated computing is still strong,” noted Toshiya Hari, another Goldman Sachs analyst, adding that demand is broadening from major tech companies to enterprises and even sovereign states.
The Long-Term Outlook: Can Tech Rebound?
With AI innovation ramping up and the potential for lower interest rates on the horizon, Big Tech may just need the right combination of circumstances to power higher again. The next few months will be critical as investors watch both the Federal Reserve’s decisions and the unfolding innovations in AI.
While the market is currently in a pullback, there’s no doubt that AI still represents a massive growth opportunity. As Rangan puts it, “When you compound innovation with lower rates, magic happens.”
Will Big Tech rediscover its magic? Only time will tell, but the stage is set for a potential rebound — and those paying close attention could stand to benefit from the next wave of growth in AI and tech innovation.