Goldman Sachs Sees Funds Rotating to Semiconductors as Software Slows
0h ago|4 min readStandard
Fazen Markets Editorial Desk
Collective editorial team · methodology
tech-sector-rotationsemiconductors
Fazen Markets Editorial Desk
Collective editorial team · methodology
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Analysts at Goldman Sachs Group Inc. (GS) identified a significant rotation of institutional capital away from enterprise software and into semiconductor stocks as of 24 May 2026. The research notes that shifting growth expectations and capital expenditure priorities are driving the realignment. This rotation highlights a pivotal evolution in the broader technology trade. Goldman Sachs shares traded at $996.73, up 1.49% on the day, as of 19:55 UTC today.
Major rotation events within the technology sector are infrequent but signal durable repricing of multi-year trends. The last comparable shift occurred in late 2021, when capital moved from high-growth but unprofitable software names toward large-cap hardware and semiconductor firms ahead of the 2022 Federal Reserve tightening cycle. The magnitude of that flow exceeded $20 billion over six months.
The current macro backdrop features moderating but persistent inflation and benchmark interest rates that remain elevated relative to the post-2008 era. This environment pressures valuations for long-duration assets like software, which rely on distant cash flows. Simultaneously, demand for advanced computing hardware is accelerating due to sustained investment in artificial intelligence infrastructure.
The immediate catalyst for the rotation is a convergence of underwhelming enterprise software guidance and resilient, upwardly revised demand forecasts for memory and logic chips. Software firms are reporting slower subscription growth and margin pressure from heightened competition. Semiconductor foundries and equipment suppliers are posting strong order books tied to AI data center build-outs and inventory replenishment cycles.
The rotation from software to semiconductors represents a clear divergence in year-to-date performance and forward-looking metrics. The iShares Semiconductor ETF (SOXX) has gained approximately 18% year-to-date, while a basket of major enterprise software stocks tracked by Goldman has declined by 7% over the same period. This 25-percentage-point performance gap is the widest since the third quarter of 2022.
Goldman Sachs's analysis points to a cumulative rotation of roughly $12 billion out of software and into semiconductor names over the past four months. This flow is evident in the differential between fund inflows to semiconductor-focused ETFs and outflows from software-focused products. The firm's proprietary data shows hedge fund net exposure to software at its lowest level in three years.
Concrete valuation metrics underscore the shift. The median forward price-to-earnings ratio for the software basket has contracted from 32x to 24x over the past twelve months. For the semiconductor basket, the median forward P/E has expanded from 18x to 22x. Revenue growth projections for the next fiscal year now favor semiconductors by a margin of 15% versus 8% for software.
The rotation suggests capital is moving toward segments with tangible near-term earnings visibility and secular tailwinds. Primary beneficiaries include chip manufacturers like Nvidia (NVDA), Advanced Micro Devices (AMD), and Broadcom (AVGO), alongside semiconductor capital equipment providers Applied Materials (AMAT) and ASML (ASML). These firms are directly linked to the AI hardware build-out cycle.
Conversely, software-as-a-service (SaaS) companies with high customer acquisition costs and slowing net revenue retention are experiencing outflows. This includes names like Salesforce (CRM), ServiceNow (NOW), and Workday (WDAY). Enterprise software firms with deeper ties to cost-saving automation and cybersecurity, like Microsoft (MSFT) and CrowdStrike (CRWD), may see more muted effects.
A key counter-argument is that semiconductor cycles are historically volatile and prone to sharp inventory corrections. The current optimism may overlook risks of overheating and eventual oversupply, particularly in memory chips. Proponents of the rotation argue this cycle is structurally different, underpinned by durable AI demand rather than consumer electronics alone.
Positioning data indicates that large multi-strategy hedge funds and quantitative macro funds are leading the rotation. Traditional long-only asset managers are following with a lag, suggesting the flow has room to continue. The capital is moving within the tech sector rather than exiting it entirely, indicating a sector-specific reallocation based on relative value.
Two immediate catalysts will test the durability of this rotation. First is the series of major semiconductor earnings reports in late July, including those from Intel (INTC) and Texas Instruments (TXN). Second is the next round of enterprise software guidance updates in early August, which will confirm or contradict the thesis of slowing growth.
Key levels to monitor include the SOXX ETF's resistance near the $700 level and software basket support around its 200-day moving average. A sustained break in either direction would signal the next phase of the trend. The 10-year Treasury yield, currently near 4.3%, remains a crucial input for software valuation models.
If semiconductor capex guidance for 2027 remains strong, the rotation could extend into supplier and materials companies. If enterprise software firms demonstrate a rebound in large-deal closures, the flow may partially reverse. The direction will hinge on concrete data points from these upcoming corporate events.
Broad-market technology ETFs like the Technology Select Sector SPDR Fund (XLK) provide blended exposure, muting the impact of this internal rotation. However, funds heavily weighted toward either software or semiconductors will see divergent performance. Retail investors in thematic software ETFs may experience continued underperformance relative to the broader market if the trend persists. Checking a fund's top holdings against the Goldman Sachs analysis is advisable.
There are parallels but also distinct differences. The 1999-2000 rotation was driven by a collapse in speculative dot-com demand and a sudden realization of the underlying infrastructure need. The current move is less about bubble dynamics and more about a recalibration of growth rates within an established, profitable sector. The magnitude of valuation disparity is also far smaller today than in 2000.
The primary risk is a double-whammy for rotated capital: losses from peaking semiconductor stocks paired with missing a potential rebound in oversold software names. Semiconductor demand is closely tied to global GDP and electronics cycles, which can turn quickly on macroeconomic news. A sharp slowdown in AI investment or a global recession would likely trigger a swift reversal of recent flows, catching late-moving investors.
Institutional capital is actively repricing technology sub-sectors, favoring semiconductor hardware's near-term certainty over software's longer-duration growth promises.
Disclaimer: This article is for informational purposes only and does not constitute investment advice. CFD trading carries high risk of capital loss.
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