Goldman Sachs warns momentum trade is at risk as AI spending slows

what happened

Goldman Sachs says a slowdown in artificial intelligence spending is set to join high interest rates and energy costs in holding back US corporate profit growth. In a note dated October 16, the bank pointed to early third-quarter results: only 53% of S&P 500 companies beat consensus profit forecasts. That is above the 50% long-run norm, but well below the 64% average of the past four quarters.

The bank also flags that market breadth sits close to its narrowest level since the dot-com bubble, which leaves the wider index exposed to sharp selloffs in recent winners if borrowing costs keep rising. Goldman expects S&P 500 earnings growth to decelerate into 2027, as capital spending by large cloud providers starts to fade. Analysts led by Ben Snider write that investors should be wary of momentum exposure, since narrow breadth tends to resolve either through leaders falling or laggards catching up, and both outcomes reverse momentum. Recent declines have hit Coherent, Lumentum, Hewlett Packard Enterprise, Super Micro Computer and Dell Technologies. For protection, the bank suggests consumer-facing laggards and defensive firms with strong cash flow, including Tyson Foods, CVS Health, Kroger, Abbott Laboratories and Merck.

why it matters

For strategies built on recent leaders, the note raises the risk of a sharp rotation into lagging and defensive sectors. Investors will be watching AI infrastructure names and the coming earnings season, which will show whether the share of companies beating forecasts keeps falling.

market impact

US stocks: risk of rotation from growth leaders into defensive sectors, pressure on AI infrastructure names

tags

instruments