Is the big tech trade over?

"The world's most interesting market." # # --------------------------------------------------------------- The key takeaways today: - Making sense of the big tech slide - The opportunities for private credit - Production growth in the largest US oil basin is slowing down - Why Japan may be the world's "most interesting market" - Global forecast changes: The British pound, global stocks, US government spending - Briefings Brainteaser: Which currency has risen against the US dollar in 2024? Was this newsletter forwarded to you? [Sign up now](. --------------------------------------------------------------- Is the big tech trade over? The US tech giants that have powered the market higher are starting to slip. Ben Snider, senior US portfolio strategist in Goldman Sachs Research, identifies two particular causes of the weakness. First, there is growing concern that the massive investment in AI may not soon translate into higher productivity or revenue. Second, while higher rates have long led to valuation premiums for the strongest companies, anticipated rate cuts are now putting the size of those premiums into question. “What's driven these stocks for most of their outperformance has been strong business models, above average revenue growth, and very high profit margins — and we've learned nothing in the last two weeks that suggests any of that is changing,” Snider says on [The Markets podcast](. "I think it's really more about very elevated positioning, very elevated valuations. In physics terms, you can think of that as high potential energy. And then we've gotten some of those catalysts I mentioned, and that has led to a very sharp positioning shift, and a very sharp shift in share prices as well.” While Snider notes that it has often been wise to buy market dips, he adds that there may be better options than the S&P 500 benchmark, which is a market-cap-weighted index of which the tech giants now comprise a large part. “I think you can make a good argument for diversifying a little bit, perhaps investing in an equal-weight S&P 500 if you are concerned about the degree of concentration or AI investment,” Snider says. Yet his overall outlook remains relatively constructive. “In broad terms, we still think the macroeconomic picture looks very healthy. We think the earnings picture for most stocks looks very healthy. We expect the Fed to start cutting interest rates pretty soon,” Snider says. “That is a good environment for owning stocks.” --------------------------------------------------------------- Private credit's long runway Mike Arougheti (L) co-founder, CEO, and president of Ares Management, with Alison Mass of Goldman Sachs Global Banking & Markets While private credit — loans typically made by nonbank lenders directly to businesses — has grown sharply in recent years, Mike Arougheti, co-founder, CEO, and president of Ares Management, says there's plenty of runway left. “Direct lending and private credit still have a long, long way to go,” Arougheti says on [Goldman Sachs Exchanges: Great Investors](. “There are structural things in play, just in terms of the aging of the population and people's desire for dependable yield, that's creating demand for private credit.” That opportunity becomes even larger when markets outside the US are taken into account. “When I look at what we've been able to do in Europe in the last 15 years, what we're building in the Asia Pacific markets, these private credit themes are in place in those markets. But the markets aren't nearly as evolved,” he says. “There are markets that haven't even opened up yet, [and] if you're early and you're willing to take risk and make investments in those markets, I think there's huge growth.” On the economic outlook, “generally, the tone's still very constructive,” Arougheti says. “One of the benefits of having the business we have is we're getting real-time information from our portfolios. And it's been constructive.” Default rates are running significantly lower than historical averages, the firm's corporate portfolios are still growing in the low double-digit EBITA range, and the consumer appears to be “quite resilient,” he says. --------------------------------------------------------------- The biggest US oil basin is headed for slower – but still robust – growth The world's largest oil basin, known as the Permian, lies in the southwestern US, and it accounts for all of the growth in US crude oil production since 2020. Last year, US production exceeded all expectations, with crude production growing by more than 1 million barrels per day. US annual average supply growth, while declining to 0.5 million barrels per day this year, is still expected to drive 60% of non-OPEC production growth, [according to Goldman Sachs Research](. Our analysts' price forecast for West Texas Intermediate oil, for 2024 / 2025, is $79 / $76 per barrel. Goldman Sachs Research expects efficiency gains to keep driving growth in Permian production. But the Permian is maturing, and the basin's crude production growth will likely slow to 6% this year and to 4% in 2026. Years of intense production have impacted the basin's rock quality, leading to geological deformations that limit further improvements in the productivity of oil wells. The Permian weekly rig count has dropped nearly 15% from last year's April high, and is down 30% from its 2018-2019 average. The rig count will likely keep edging downwards, from 309 today to fewer than 300 by the end of 2026. Although slowing, the growth of Permian production will remain robust through 2026. “Drilling and completion efficiency continues to improve via lower drilling costs and shorter drilling and completion times,” Yulia Grigsby, an energy economist in Goldman Sachs Research, writes. “This year, every stage of a well's building cycle in the Permian was 20-50% faster than in 2019.” --------------------------------------------------------------- In a dynamic global economy, Japan may be the "world's ‘most interesting market" Amid geopolitical flashpoints in the South China Sea, the competition between the US and China over AI, and gyrations in Japanese assets, the outlook for Asian economies and financial markets is in flux. Jared Cohen, president of global affairs and co-head of the Goldman Sachs Global Institute, and Sam Morgan, global head of FICC sales and co-head of One Goldman Sachs, speak about the transformations in the world's most populous region. Cohen: What are the major themes for investing in Japan? Morgan: The Bank of Japan is discussing hikes and other policies to tighten monetary conditions. Many investors see asymmetry in Japanese government bonds due to potential changes in bond purchases by the BoJ. The yen has weakened substantially in recent years, with USD / JPY moving from around 110 to around 160. These shifts in currency, bond curves, and policy are catalyzing interest in Japanese equities. Overall, across rates, foreign exchange and equities, Japan may be the most interesting market in the world right now. Cohen: How have investors' views of Chinese assets changed in recent years? Morgan: Global investors have been hesitant to invest in Chinese assets, due to concerns about the Chinese growth trajectory and the US presidential election. The US election carries uncertainty for the future shape of the US-China relationship, and the potential for significantly higher tariffs. There are significant opportunities in certain Chinese asset markets but, against a cloudy macroeconomic and geopolitical backdrop, the caution of international investors is understandable. Morgan: How is artificial intelligence reshaping the balance of power in East Asia? Cohen: The US and China are leading AI powers, and significant foreign policy moves by the Biden administration have targeted China's AI capabilities. But this competition isn't settled. China has a developed semiconductor industry and its own advantages. Three important players in AI innovation are US allies or partners in East Asia, and they account for a substantial proportion of all global advanced semiconductor production. AI has put the region at the center of today's global technology competition. --------------------------------------------------------------- Global forecast changes: The British pound, global stocks, US government spending ↑ The British pound: The pound is likely to grow stronger against the euro and the US dollar, supported by a more benign broader global outlook, and with less of a drag from domestic monetary policy or political and fiscal uncertainty than in recent years, according to Goldman Sachs Research. Our analysts revised their EUR / GBP forecast downwards to 0.83, 0.83, and 0.82 in three, six, and 12 months (compared with previous forecasts of 0.85, 0.85, and 0.84) respectively. In tandem, the forecast for GBP / USD has risen to 1.32 over a 12-month horizon, compared to 1.28 previously. ↓↑ Global equities: After a strong rally in equities in the first half of 2024, Goldman Sachs Research [sees a risk]( of a summer setback, due to weaker growth data, already dovish central bank expectations, and rising policy uncertainty heading into the US elections. As a result, our analysts shift to neutral on stocks over a three-month horizon. But given strong corporate balance sheets and better potential for returns than credit, Goldman Sachs Research remains overweight on equities over 12 months. ↓ US government spending: Goldman Sachs Research [forecasts]( a deceleration in US government spending in the second half of 2024. Federal spending is likely to remain roughly flat, as it did in the first half of the year. But state and local government expenditure is expected to slow from a 3% pace (annualized) in the first six months to 1% in the second half. State budgets point to a spending slowdown in the new fiscal year, which began on July 1 for most states. Data as of July 24, 2024. --------------------------------------------------------------- Briefings Brainteaser: Up against the dollar The US dollar index, which tracks the greenback against a basket of other currencies, has risen 3.1% this year (as of July 23) and has outperformed most G-10 currencies. Which of these currencies has risen against the US dollar in 2024? A) South Korean won B) Pakistani rupee C) Canadian dollar D) Euro [Check the answer here](. --------------------------------------------------------------- Goldman Sachs in the news By clicking on these links, you will be redirected to external websites that Goldman Sachs does not own or operate.  Goldman Sachs is not responsible for the products, services, or content provided on those sites.  Please refer to each external website's terms, privacy and security policies for details. 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