The current wave of artificial intelligence (AI) hype has fueled a rally in technology stocks, but there are growing concerns that some corners of the market are being left behind in the current frenzy. And the latest data from Goldman Sachs suggests hedge funds are dumping software stocks.
In the week through May 31, funds sold a record amount of information-technology stocks, with software accounting for more than 60% of the sales, according to Goldman’s prime brokerage. The bank’s data show that hedge funds’ net exposure to software is now at its lowest level in more than five years.
“Many fund managers we speak with have rotated out of software-as-a-service or SaaS stocks into AI/semiconductor plays,” said Jon Caplis, chief executive officer at hedge fund research firm PivotalPath. “This is partly driven by tremendous interest in AI processing power and the slowdown in SaaS subscription bookings.”
More broadly, hedge funds are paring their overall exposure to mega-cap tech stocks. But they’re also betting on companies set to benefit from the expansion of AI. Semiconductors and semiconductor equipment were the only technology sectors to see net buying last week, according to Goldman’s data.
While the S&P 500 Information Technology Index has rallied about 17% this year, performance has varied widely at the industry level. The S&P Semiconductor and Semiconductor Equipment Index, for instance, has jumped 57% this year, while the S&P Software & Services Index has gained just 2.2%.
“With the exception of Microsoft Corp., we don’t foresee most large software companies benefiting from AI tailwinds in the near term,” said Anurag Rana, senior technology analyst at Bloomberg Intelligence.
AI-related software stocks are facing a “trough of disillusionment,” according to analysts at D.A. Davidson. The sector is also grappling with a worsening macroeconomic backdrop and geopolitical risks that are prompting businesses to delay upgrading plans.
So, with no signs of a slowdown in AI-related investments, hedge funds appear most willing to put their money into chips, as evidenced by Nvidia Corp.’s continued rocket ride. At least for now.
“Semiconductors should continue to be a leadership group into the second half of 2024 as demand remains strong and innovation in the space continues at a rapid pace,” said Jay Woods, chief global strategist at Freedom Capital Markets. “Nvidia will continue to lead, but others should follow.”