Wall Street Doubles Down on AI Trade as Earnings Season Looms

Nvidia CEO Nelson Huang. (JOSH EDELSON/AFP via Getty Images))

Goldman Sachs led a parade of Wall Street firms boosting their price targets on the biggest AI-focused stocks as investors double down on the hottest tech-sector trade heading into the second-quarter earnings season.

Nvidia, the world’s most valuable stock and the epicenter of artificial-intelligence investment topped the $4 trillion mark during intraday trading on Wednesday. It was modestly lower near midday on Thursday.

The AI chip maker will be the last of the megacap tech companies to report its results, with an update expected in late August. Still, its rally of more than 50% over the past three months—a sign of investors’ confidence in the AI play—has raised expectations for a solid reporting season for both its rivals and biggest customers.

In a note published Thursday, Goldman Sachs analyst James Schneider called Nvidia “the industry standard in accelerated computing,” given its command of both the semiconductor and software side of the AI market.

Schneider initiated coverage of the stock with a Buy rating and a target of $185 for the stock price, citing Nvidia’s “product leadership and rapid cadence of introductions, a broadening of the customer base, and early signs of AI monetization.” He added that an “attractive valuation can drive outperformance versus our coverage.”

Schneider also initiated coverage on AI rival Broadcom, giving it a Buy rating and a $315 price target. He rated Advanced Micro Devices at Neutral, with a target of $140.

In other moves, Piper Sandler analyst Brent Bracelin lifted his price target on Microsoft by $125, taking it to $600 a share with an Overweight rating. Deutsche Bank initiated coverage on chip maker Micron Technology with a Buy rating and a $150 price target.

Late Thursday morning, Nvidia stock was down 0.1% at $162.73. Broadcom slid 1.1% to $274.73 and AMD gained 4.1% to $144.10. Microsoft slipped 0.7% to $500.08 while Micron rose 0.9% to $123.36.

The AI investment theme remains the market’s most powerful thesis. It has driven the lion’s share of gains for the S&P 500 since the lows it hit in early April.

Just five stocks, Nvidia, Microsoft, Meta Platforms, Broadcom, and Amazon.com, have powered around half of the S&P 500’s 5.2% return over the past month, according to LPL Financial’s chief technical strategist Adam Turnquist.

Investors are now looking to the second-quarter earnings season to solidify that momentum.

LSEG data suggests collective second-quarter earnings for the S&P 500 are likely to rise 5.8% from last year to $528.3 billion. Nearly all of the gains are expected to come from two sectors: Information Technology and Communications Services.

The former is dominated by AI giants Nvidia, Apple, Microsoft, Broadcom, and Oracle. Alphabet and Meta Platforms lead the latter category.

Meta has arguably been the busiest of the megacap AI stocks heading into its second-quarter update at the end of the month. The Facebook parent has made a $3.5 billion investment in eyeglass maker EssilorLuxottica; hired Apple executive Ruoming Pang to join its AI-focused Superintelligence Lab, according to a Wall Street Journal report; and paid $14.3 billion for a 49% stake in the data-labelling start-up Scale AI.

Bank of America analyst Justin Post said the EssilorLuxottica stake would enhance Meta’s effort to monetize AI through a wearable hardware strategy and allow it to “participate (somewhat) in any smart glasses sales appreciation” of the Ray-Ban and Oakley maker.

“The two companies first partnered in 2019 to develop Ray-Ban Meta smart glasses, which enable users to take photos, livestream to Instagram or Facebook…and do real-time language translation,” he said.

Post lifted his Meta Platforms price target by $75, taking it to $765 a share, while maintaining a Buy rating on the stock.

The ability to monetize AI investments is likely to prove crucial to the performance of the megacap stocks over the near term, given the enormous amounts of capital spending the world’s biggest companies have planned. Total spending was pegged at around $235 billion last year, according to International Data Corporation figures, and is likely to rise past $630 billion by 2028.

Spending on agentic AI, which is focused on task automation, is likely to hit $155 billion by 2030, according to Bank of America.

Wedbush analyst Dan Ives argued in a note published Thursday that Microsoft could be the first of the AI-focused firms to reach the point where revenue begins to grow faster than capex. That is the key to turning those enormous investments into profit.

Ives, who maintained a Buy rating and $600 price target on the stock, said Microsoft could **“**hit the $4 trillion market cap club this summer” with a $5 trillion valuation in sight over the next 18 months.

“The poster children for the AI Revolution are led by Nvidia and Microsoft as both are foundational pieces of building on the biggest tech trend we have seen in our 25 years covering tech stocks on the Street,” Ives said.

Write to Martin Baccardax at martin.baccardax@barrons.com