Goldman Sachs Asset Management (Goldman Sachs AM) said that it expects the AI boom to broaden out from the Magnificent Seven during the second half, according to its mid-year outlook.
“We see a new layer of AI beneficiaries emerging that are simultaneously backed by fundamentals and complementary to the Magnificent Seven, including companies enhancing AI by harnessing the power of data,” it said.
“Scrutiny of AI strategies, returns on investments and profitability is likely to heighten as corporate AI spending grows. This underscores the need for careful security selection and active management.”
Regarding equities, the US investment manager also said that it expects that after a period in which US small caps had struggled relative to their large-cap peers this trend would reverse, noting that monetary policy easing has generally acted as a tailwind for the asset class.
It also said it expects European equities, another laggard, to fare better given the fact that the European Central Bank (ECB) has begun cutting rates before the US Federal Reserve, while it noted that Japanese equities should continue to perform well given the reemergence of inflation and corporate governance reforms.
Regarding fixed income, Goldman Sachs AM took a nuanced view on duration, noting that this depended on the region. In the US, it said that it expects to see the yield curve steepen, while in Europe it was neutral as the ECB’s easing bias was offset by the possibility of inflation surprising on the upside.
It also highlighted the possibility for investors to capture carry in the emerging market sovereign space and highlighted markets including Chile, the Czech Republic and Hungary being particularly attractive, due to the prospect of monetary easing.
In terms of sectors, Goldman Sachs AM favours defensive sectors such as banks as well as those benefiting from megatrends such as decarbonisation and digitisation, including telecoms providers.
It also noted that securitised credit looks attractive, including commercial mortgage-backed securities and collateralised loan obligations, due to the potential for spread tightening during the second half of the year as well as strong fundamentals, particularly towards the top end of the capital structure.
In terms of alternatives, Goldman Sachs AM noted that competitive pressures in private credit had led to spread tightening, although it is still not forecasting distress, while in infrastructure, it noted that higher rates had been a headwind, although there were areas of strength, notably in energy transition and digitisation.
