LIVE MARKETS-Dot-com deja vu? Why Goldman Sachs is calling time on the momentum trade

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DOT-COM DEJA VU? WHY GOLDMAN SACHS IS CALLING TIME ON THE MOMENTUM TRADE

A slowdown in artificial intelligence spending is poised to join high interest rates and energy prices in crimping US profit growth, Goldman Sachs said in a note dated October 16.

The brokerage noted that early third-quarter results reinforce this trend, with only 53% of S&P 500 companies beating consensus profit estimates, above the 50% long-term norm but down sharply from the 64% average over the past four quarters.

The cooling beat rate is critical for Wall Street because equity market breadth hovers near its narrowest point since the dot-com bubble, leaving the broader market vulnerable to sudden drops in recent winning stocks as borrowing becomes more expensive.

Goldman Sachs expects S&P 500 earnings growth to slow heading into 2027 as the capital expenditure boost from AI hyperscalers begins to diminish.

"In contrast with the historical playbook, extremely narrow market breadth today cautions investors to be wary of Momentum factor exposure," Goldman Sachs analysts led by Ben Snider wrote.

"Narrow breadth can resolve with either a 'catch down' by recent outperformers or a 'catch up' by recent laggards, but either outcome results in a reversal of Momentum," added Snider.

That momentum unwind has already hit tech hardware and AI suppliers, driving sharp weekly declines in Coherent Corp COHR.N, Lumentum Holdings LITE.O, Hewlett Packard Enterprise HPE.N, Super Micro Computer SMCI.O, and Dell Technologies DELL.N.

To hedge against further downside, Goldman Sachs recommends rotating into consumer-facing laggards and defensive, cash-generative equities, including Tyson Foods, Inc. TSN.N, CVS Health Corporation CVS.N, Kroger Co. KR.N, Abbott Laboratories ABT.N, and Merck & Co., Inc. MRK.N.

(Akriti Shah)

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