Analysts project stock trades will shift beyond the “Magnificent 7”

Investors are projecting the enthusiasm that has driven the “Magnificent 7” tech stocks to record highs this year to spread even further into other areas like software stocks.

Amazon, Meta, Alphabet, Meta, Google, Apple, and Nvidia have seen their prices reach record highs, thanks to the AI hype. Nvidia’s shares specifically boast an over 175% increase this year.

More than the “Magnificent 7” will benefit in 2025

However, investors are certainly expecting the hype to expand to other stocks, for instance, areas like utilities and software stocks which will keep benefiting from Big Tech’s massive AI bet.

David Kostin, a Goldman Sachs chief US equity strategist forecasts the S&P 500 will reach 6,500 by the end of 2025 while the rest of the market’s gains are projected to come closer to those large-cap tech stocks.

“It’s less about valuation but more about earnings growth that will dictate those returns,” said Kostin during a Goldman Sachs 2025 media roundtable with reporters.

“The narrowing of the differential between the growth rates is likely to lead to a narrowing of [difference in] the performance.”

Kostin.

Kostin also projects the rapid earnings growth that was seen in large caps over the past 18 months will slow, while earnings are seen picking up for the other 439 stocks in the S&P 500.

Another projection came from BofA’s equity strategy team led by Savita Subramanian. They issued a year-end target of 6,666 for the S&P 500 next year that includes a call for a broadening of earnings driven by AI.

“AI is definitely playing a role in 2025 earnings,” Subramanian told Yahoo Finance.

“And in fact, one of the reasons that we’re bullish on the broadening out of earnings is the idea that instead of everybody spending on tech capex, tech capex is actually picking up, and tech companies are sort of spending on a broader array of industries,” added Subramanian.

Microsoft, Alphabet, Amazon, and Meta alone are anticipated to increase their capital expenditures by 42% in 2024 and another 17% in 2025 subsequently expanding their total spend to $244 billion in 2025.

Utilities providers to cash in on AI

However, according to Yahoo Finance, not all of this spending is on AI chips, as tech firms are also ramping up spending to pay for the power required to run AI data centers. Studies have shown that energy consumption at data centers is increasing in line with the increasing demand for AI services.

This is pushing tech companies to look for alternative energy sources to power their data centers.

During the roundtable with reporters, BlackRock’s Investment Institute revealed that the power required to operate one data center is about equal to the average amount of power used in a day by all of New York City.

Because of this, strategists including BofA’s Subramanian are bullish about the companies exposed to this particular technology buildout. This includes the Utilities sector (XLU), which is already up by more than 20% in 2024, partially spurred by AI optimism.

According to Goldman Sachs, the shift is already there. In his 2025 equity outlook, Kostin emphasized a basket of three potential AI trades, highlighting the shift from “Phase 1” stocks like Nvidia to “Phase 2” stocks like Goldman’s AI “infrastructure” bucket is already underway.

AI infrastructure stocks, including semiconductor companies like Arm Holdings and utility power plays like Vistra Corp have already experienced significant rallies.

Goldman believes the changing of the AI guard in the year ahead will further hold as the trades continue to shift to “phase 3” under a basket of stocks that the firm has labeled “enabled revenues.”

“Enabled revenues” refers to a group of firms that will benefit from the rollout and monetization of AI solutions. These are companies that can use AI to drive sales but not actually sell merchandise like AI chips to other companies.

Goldman is tracking these companies in this basket, and these include software and services stocks, for example, Adobe, Mastercard, and Salesforce.

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