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Goldman Sachs analysts have turned surprisingly bearish on chipmakers, advising investors to hedge their exposure to the sector by purchasing put options.
In a note shared Friday, analyst Arun Prakash, CFA, cautioned about the potential for further downside in the semiconductor sector in the near term. This warning comes after recent losses triggered by news of potential heightened China export restrictions.
“We believe the extreme crowding, geopolitical risks, upcoming earnings, and low skew provide an attractive opportunity for investors to hedge drawdown risks,” stated Goldman Sachs.
The firm advises investors to consider buying 3-month 5% out-of-the-money (OTM) put options on the VanEck Semiconductor ETF (NYSE:SMH).
Semiconductor stocks have seen a significant rally since the start of 2023, with the iShares Semiconductor ETF up by an eye-popping 153%, primarily driven by optimism around AI.
Image: Benzinga Pro
However, Goldman Sachs strategists caution the AI trade has recently come under increased scrutiny. They suggest that investors should pay close attention to sales revisions as a critical indicator of the AI trade’s sustainability.
Analysts highlighted that market consensus expects all five mega-cap AI-related tech stocks to report a slowdown in sales growth, with four of them also anticipated to see a contraction in net margins in the second quarter. Most AI-related companies are set to report earnings in late July, with NVIDIA Corp. (NASDAQ:NVDA) expected to release its results in late August.
“The geopolitical backdrop remains uncertain and the potential for additional China export restrictions remains a major risk for the sector,” according to Goldman Sachs’ semiconductor analyst Toshiya Hari.
As a destination for shipments, China represented approximately 40% of the total revenue over the trailing 12 months for three major U.S. semiconductor equipment companies.
In recent weeks, prediction markets have significantly shifted toward favoring a Republican victory in the upcoming November elections.
According to Polymarket, betting-implied odds of a Trump victory are as high as 63%, while Biden’s chances have fallen to as low as 5%. Kamala Harris is gaining ground in the polls, with her victory now priced at 23%, though her candidacy as the Democratic nominee still requires party approval.
As the presidential election draws nearer, Goldman Sachs anticipates that the China trade risk will become a central issue in political discussions.
The investment bank expects that hedging volatility risk in stocks with significant exposure to China is a strategic move for investors concerned about the election’s impact on US-China trade relations.
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