Escape the software embrace and embrace the chip! Goldman Sachs reveals a $9 trillion position: hedge fund software stock allocation drops to a low not seen since 2019, with AI infrastructure becoming a consensus choice.

Notice that, the Goldman Sachs Group, Inc. strategy team led by Ben Schneider pointed out in their latest report that hedge funds and mutual funds are continuing a notable rotation of positions - significantly reducing exposure to software stocks and further deepening their involvement in the semiconductor sector. This highlights investors' repositioning for the next phase of stock market rebound driven by artificial intelligence (AI). Goldman Sachs Group, Inc.'s latest "US Weekly Takeoff" report analyzes the total stock holdings of approximately $9 trillion in hedge funds and large-cap mutual funds. The report found that the semiconductor risk exposure in hedge fund portfolios has surged to a historical high, while the allocation to software stocks has fallen to its lowest level since 2019. At the same time, mutual funds, after excluding Microsoft Corporation, have reached their largest underweight position in software stocks since 2012. This shift reflects a broader reassessment in the tech stock investment sector, as fund managers increasingly favor companies that are building AI infrastructure, rather than many companies selling enterprise software tools. In semiconductor stocks, hedge funds increased their positions in Lam Research Corporation (LRCX.US), Applied Materials (AMAT.US) and ASML Holding NV ADR (ASML.US) in the second quarter, while mutual funds increased their risk exposure to Intel Corporation (INTC.US) and SiTime (SITM.US). Both groups decreased their risk exposure to Microsoft Corporation (MSFT.US) in the second quarter on a net basis. The report also shows a growing divergence between active fund managers and the broader market rebound. According to data from Goldman Sachs Group, Inc.'s large-scale brokerage services, hedge funds have achieved a return of 7% year-to-date, thanks to the rebound of momentum stocks in the second quarter. Large-cap mutual funds have also risen by 7%, but only 30% of funds have outperformed their benchmarks so far this year, lower than the 37% historical average. Why is it worth paying attention These position data provide a window into where institutional investors believe the market's leaders in the next phase may emerge. The rotation to semiconductors indicates that professional investors are still committed to investing in AI infrastructure, but are becoming more selective in choosing which parts of the tech ecosystem can sustain profit growth and support high valuations. The report also highlights the increasing concentration risk in a market dominated by a few giant tech companies. Goldman Sachs Group, Inc. points out that the top 10 companies now account for 40% of the total market value of the S&P 500 index, as well as 36% of the total earnings of the index. Despite political tensions earlier this year with GEO Group Inc., hedge funds have been actively rebuilding their risk exposure. Goldman Sachs Group, Inc. states that, compared to the past five years, hedge funds' net leverage ratio has climbed back to the 85th percentile, while the total leverage ratio remains high compared to historical norms. At the same time, mutual funds have moderately increased their cash levels from historical lows, although their allocation remains relatively low by historical standards. In terms of sector allocation, hedge funds and mutual funds have reached a broad consensus in many areas of the market. Both groups overall maintain an overweight position in the industrial sector and an underweight position in the information technology sector, but there is a sharp divergence in financials and consumer discretionary stocks. Hedge funds are overweight consumer discretionary stocks, while mutual funds are underweight. The situation is exactly the opposite for financial stocks. Goldman Sachs Group, Inc. also identified four "joint favorites" stocks significantly held by hedge funds and mutual funds: Boeing Company (BA.US), Mastercard (MA.US), Marvell Technology, Inc. (MRVL.US), and Visa (V.US). These stocks have achieved a return of 10% so far this year, outperforming the equal-weighted S&P 500 index (EQWL) by about three percentage points. Despite the strong market rally, strategists remain relatively cautious about the broader market. Goldman Sachs Group, Inc. set a target of 7,600 points for the S&P 500 index by the end of 2026, which implies a 2% upside from the current level near 7,446 points. Meanwhile, valuations remain stretched by historical standards. The forward price-earnings ratio of the S&P 500 index is currently around 21 times, while the forward price-earnings ratio of the Nasdaq 100 index is close to 26 times. In all sectors, the premiums of industrial and consumer staples sectors are the most expensive compared to their historical ranges. However, Goldman Sachs Group, Inc. strategists believe that profit growth still provides support, with an expected earnings per share (EPS) of $309 for the S&P 500 index by 2026, and $342 by 2027.