To get big tech stocks powering higher again, it will take the convergence of two factors, says Goldman Sachs' veteran tech analyst Kash Rangan.
The magic formula is a steady dose of interest rate cuts from the Federal Reserve combined with a burst of innovation that jumpstarts earnings growth in excess of 20%.
"We have to get the industry back from an 11% growth rate to 20%-30% and to do that, new innovation has to happen," Rangan told Yahoo Finance at the Goldman Sachs Communacopia & Technology Conference on Monday.
Rangan — a bull on Microsoft (MSFT) and Salesforce (CRM) — says the tech sector must deliver on the AI front in areas like upselling customers and monetization.
"When you compound that innovation with lower rates, magic happens," Rangan said.
Investor attention is squarely on the Fed as it nears its next monetary policy decision on Sept. 18.
The Fed has widely telegraphed its first rate cut in several years as it looks to stabilize an economy that's beginning to slow.
"I wouldn't rule out 50 basis points, but 25 basis points strikes me as more likely," Goldman Sachs chief economist Jan Hatzius told Yahoo Finance at the conference.
"I think there is a solid rationale for doing [a 50 basis point cut]. And the rationale is that five and three-eighths, five and a quarter to 5.5% is a really high fed funds rate. It's the highest policy rate in the G10. It is despite the fact that the US has actually seen more progress on inflation than most G10 economies," Hatzius added.
As for the other component, that may take a little more time — although signs of fresh innovation inside the AI growth story is beginning to surface.
Salesforce co-founder and CEO Marc Benioff told me in late August the company is on the cusp of releasing AI powered digital agents that can help businesses automate customer service. Salesforce will charge the usage by conversation, Benioff says.
Meantime, AMD (AMD) chair and CEO Dr. Lisa Su took the veil off a series of new AI chips through 2026 in an interview at the conference today.
"AI is a much larger cycle than I would have expected five years ago," Su said.
To be sure, tech stocks could use a little magic right now.
The tech-heavy Nasdaq Composite has shed about 5% in September as investors take profits in hot AI trades amid fears of slowing economic growth. Investors have also been concerned about an AI spending slowdown, triggered in part by mixed second quarter earnings from chip powerhouse Nvidia (NVDA).
Nvidia is off by a whopping 11% month to date, with AMD down 7%.
"The recent performance [of Nvidia's stock] hasn't been great, but we do remain positive on the stock," Goldman Sachs analyst Toshiya Hari told Yahoo Finance at the conference. "First of all, demand for accelerated computing continues to be really strong. We tend to spend quite a bit of time on the hyperscalers — the Amazons (AMZN), the Googles (GOOGL), the Microsofts (MSFT) of the world — but you are seeing a broadening in the demand profile into enterprise, even at the sovereign states."
Three times each week, I field insight-filled conversations with the biggest names in business and markets on Opening Bid. Find more episodes on ourvideo hub. Watch on yourpreferred streaming service. Or listen and subscribe on Apple Podcasts, Spotify, or wherever you find your favorite podcasts.
In the below Opening Bid episode, State Street Global Markets head of equity research Marija Veitname makes her case for the AI sell-off being overdone.
Brian Sozzi is Yahoo Finance's Executive Editor. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn. Tips on deals, mergers, activist situations, or anything else? Email brian.sozzi@yahoofinance.com.
Click here for the latest technology news that will impact the stock market
Read the latest financial and business news from Yahoo Finance