[Market Analysis] The $2 Trillion Question: Is the Software Sector a "Drooping Sword" or a "Rebounding Spring"?

Recent sharp liquidations in the gold and silver markets have reminded people of the massive chaos in the cryptocurrency markets last fall, injecting a sense of tension into the market. In this volatile environment, Goldman Sachs chief trader Louis Miller has raised a “2 Trillion Dollar Question” that will determine the future direction of the markets.

The core of this question revolves around the fate of large tech stocks, especially the “software sector.”

◆ Evaporating $2 Trillion in the Software Sector: Is it a “Falling Knife” or a “Spring Loaded for a Strong Rebound”?
Recently, the US software sector has lost up to $2 trillion in market value from its peak, posting its worst weekly performance in nearly four years. Investors are avoiding this sector, which has also been the most shorted area on major brokerages’ books since the beginning of the year.

Market doubts run deep. Is the current decline in the software sector a “falling knife” that could cause huge losses if blindly bought, or is it like a beach ball pressed underwater, ready to “rebound strongly” like a spring?
Valuations based on P/E ratios have fallen from 51 times a year ago to around 27 times now, close to the overall market level. However, Goldman Sachs analysts believe that relative to earnings growth, the sector may still appear expensive, and fears that AI will disrupt existing industries have kept low-priced buying from flowing in easily. News about Anthropic releasing new AI tools has further fueled these concerns.

Ultimately, where the stock prices of large companies like Microsoft will bottom out, and how quickly AI-induced market chaos unfolds, are expected to be key variables in determining the answer to this “2 Trillion Dollar Question.”

◆ Alternative Options Lie in the “Real Economy” Focus on Banking, Real Estate, and Security Themes
Given the uncertainty in the software sector, Goldman Sachs recommends shifting focus to themes in the “real economy.” During periods of high volatility, investing in sectors not exposed to momentum factors related to the real economy may be a prudent approach.

First, US regional banks. Factors such as a steep yield curve, regulatory easing, and potential warming of M&A activity make them promising investment options.
Second, UK real estate. As the Bank of England’s rate cut prospects increase, the undervalued real estate market is expected to benefit.
Third, national security and onshore manufacturing themes. Amid geopolitical shifts, major countries like the US, Germany, and Japan are working to protect their domestic industries and strengthen defense, leading to a reassessment of traditional industries. Especially in Japan, expectations for economic security policies have heightened ahead of the early weekend elections.

◆ Unmissable Seasonal Opportunity: China’s “Spring Festival Trading”
On the other hand, unrelated to the current chaos in tech stocks, there is a seasonal investment opportunity worth noting—the “CHEERS Trade” around China’s Spring Festival.

Historical data shows that over the past 25 years, 18 years saw positive returns in the Chinese stock market during the Spring Festival period. This is because investors tend to take on more risk during this time. It can serve as a good way to diversify against the current volatility in US and European markets.

Next week, the US will release key macroeconomic indicators such as non-farm payrolls and the Consumer Price Index, with markets expected to closely watch AI’s impact on employment and inflation trends.