The bullish case for megacap tech

Why the yen carry trade is unwinding. # # --------------------------------------------------------------- The key takeaways today: - The megacap tech story is far from over - Why the unwinding of the yen carry trade shocked global markets - Only a quarter of Saudi Arabia's $1 trillion capex plan will go into oil - Europe's chip companies are benefiting from the AI spending wave - How markets have reacted to tensions in the Middle East - Briefings Brainteaser: Which country has seen the highest cumulative change in women's workforce participation? Was this newsletter forwarded to you? [Sign up now](. --------------------------------------------------------------- The case for megacap tech The bullish case for megacap tech stocks remains intact, according to Peter Callahan, the US Technology, Media and Telecommunications sector specialist within Goldman Sachs Global Banking & Markets. The biggest tech stocks, dubbed the “Magnificent 7,” fell sharply in July and early August. Callahan says the drop reflects mixed earnings reports and growing skepticism about AI. The AI theme “has ebbed and flowed a bit, with investors oscillating between ‘This is very exciting, and this is going to change everything' to ‘The cost is really high, and it's going to take some time for this to monetize and really be impactful for an enterprise or a consumer environment,'" Callahan tells Mike Washington, equities sales trader with Goldman Sachs Global Banking & Markets, [on The Markets podcast](. Yet Callahan remains optimistic. “I think the tech story is far from debunked, given strong defensive plus secular growth opportunities within these businesses — and, frankly, a generative AI story that is more ahead of us than behind us.” --------------------------------------------------------------- The huge impacts of the yen carry trade The rapid unwinding of the Japanese yen carry trade has sent shock waves through global markets. A surprise rate hike from the Bank of Japan, combined with the prospect of more rapid cuts by the Federal Reserve, narrowed the spread that investors were earning by borrowing in Japan's low-yielding currency to invest in higher-yielding currencies like the US dollar and the Mexican peso. “When you have markets at a high level, [and] when you have particular trades that are very highly crowded and concentrated, it doesn't take very much to move things the other way,” Kamakshya Trivedi, head of Global Foreign Exchange, Interest Rates, and Emerging Markets Strategy with Goldman Sachs Research, [says on the Exchanges podcast](. “There were some genuine fundamental reasons for some degree of unwind in the yen carry trade specifically that we talked about — some genuine fundamental shifts in the macroeconomic picture in Japan and the US," Trivedi says. "But some of the broader volatility does feel to me like it's a few different things that came together in a perfect storm.” Many faster-moving investors, such as hedge funds, dumped out of the trade around the same time, says Praneet Shah, co-head of Global G10 FX Options Trading with Goldman Sachs Global Banking & Markets. As a result, several strategies correlated to the yen carry trade suffered rapid exits as well. “You have this negative feedback loop,” Shah says. He explains that the rapid unwind of the yen carry trade led to a “position purge…that ended up in positions needing to be pared down across the board.” For that reason, the swift move in the yen “had a pretty widespread impact across other markets.” In case you missed it: Read [our previous article]( on how to navigate a deepening global stock correction. --------------------------------------------------------------- Only a quarter of Saudi Arabia's $1 trillion capex plan will go into oil In what Goldman Sachs Research calls a “capex super-cycle,” Saudi Arabia is expected to invest $1 trillion across six strategic sectors by 2030. But the oil industry is likely to receive a smaller portion of this than previously forecast. Roughly 73% of the investment funds will go to non-oil sectors, Faisal AlAzmeh, who heads CEEMEA equity research and covers natural resources, chemicals, and infrastructure in the Middle East, [writes in his team's report](. An earlier forecast pegged non-oil investment at 66%. Clean energy is expected to get $235 billion in funding, up from a previous forecast of $148 billion, with the energy transition remaining a core focus for spending. Saudi Arabia is also funding sectors that enable an economic diversification away from oil, such as metals and minerals, transport and logistics, and digitalization. --------------------------------------------------------------- How AI investment is flowing into Europe's chip companies As companies explore new generative artificial intelligence technologies, immense spending on the required infrastructure is underway. At the same time, investors are debating the extent to which reality will keep pace with the extraordinary hopes for AI technology. In Europe, some of that money is being spent to boost digital enablers — companies with technology vital to build the chips powering the data centers that run the AI models. Double digit boosts to longer-term earnings power for certain digital enablers in Europe are possible, with beneficiaries in Germany, France, and especially the Netherlands,[according to Goldman Sachs Research](. “The sheer scale of investment on the hardware side globally is clearly having an impact on a regional basis in Europe, affecting the digital enablers — the companies needed to make the AI expansion possible,” says Goldman Sachs Research analyst Alexander Duval. In case you missed it: Read [our previous article]( on whether the $1 trillion in generative AI investment will pay off. --------------------------------------------------------------- How markets are reacting to Middle East tensions As geopolitical tensions in the Middle East continue to spike, threatening to spill over into a broader war, markets have reacted — but not as sharply as might have been expected. Sam Morgan, co-head of One Goldman Sachs and global head of FICC sales, says regional assets, such as US dollar-Israeli shekel exchange rates, have been impacted and gyrated in recent months. “But the impact on commodities has been fairly limited. The oil price is currently down on the month, and global equity and bond markets have been focused elsewhere,” Morgan says. The primary drivers of recent moves in the equity market have been changing perceptions around the timing and magnitude of Fed cuts, US employment and inflation data, tech earnings and AI developments, rather than the Middle East conflict. Usually, tensions in the Middle East impact global growth through the price of oil. To date, the oil market has largely shrugged off geopolitical concerns and focused on the impact on demand of US and China growth slowdowns (and the potential impact of the US election on oil supply). To be sure, a further escalation of the conflict could push up oil prices if critical oil infrastructure were endangered. But the broader lesson remains that the markets focus first and foremost on the economy and policy, Morgan says. “Geopolitical tensions have major impacts on specific companies, sectors (such as defense), and countries. But for global impacts, there needs to be a direct knock-on to growth, inflation (via oil prices, say), or monetary and fiscal policy.” --------------------------------------------------------------- Briefings Brainteaser: Women at work Many OECD countries in recent years have seen a clear upward trend in women's labor force participation. Which country saw the highest cumulative change between 1991 and 2022? A) Germany B) US C) UK D) Japan [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. [Bloomberg]( Aug 9 Expect three Fed cuts by end of year, Goldman Sachs says (2:17) [CNBC]( Aug 12 "Volatility could remain elevated for quite a while," Goldman Sachs strategist says (3:43) [Bloomberg]( Aug 15 The David Rubenstein Show: David Solomon (24:06) --------------------------------------------------------------- --------------------------------------------------------------- Some of the images used in this newsletter are sourced via Getty Images. 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