As AI stocks correct, Goldman Sachs sees opportunity in healthcare & non-AI equities

The US midterm elections could accelerate the ongoing rotation in stock markets, with healthcare emerging as a potential defensive investment amid a correction in artificial intelligence (AI)-related stocks, according to Lou Miller, global head of custom basket trading at Goldman Sachs.

Speaking on Goldman Sachs' The Markets podcast, Miller said investors had already started moving towards defensive positions ahead of the elections, amid a challenging environment for active investors in the second half of 2026.

"We've seen people get very defensive. If you look at beta-adjusted net exposure in our prime book, it's definitely at very low levels versus history," he said.

Miller pointed to sharp declines in several segments of the AI investment theme. Data centre stocks have fallen 36% from their highs earlier this year, while memory stocks have declined 42%, optical networking stocks 46% and NeoCloud stocks 57%.

However, he said the correction had lowered expectations and could leave room for positive surprises.

"I think the silver lining is the bar is much, much lower for surprises and there are positive catalysts ahead," he said.

"The multiple for the data centre trade is about half of what it was in June," Miller added, saying valuations had moved to healthier levels.

Healthcare emerges as potential AI growth area

Miller identified healthcare as a possible beneficiary of the next phase of AI adoption, saying the sector could be among the few to see accelerating earnings growth next year.

"I think the next leg of the AI trade is actually healthcare, and I think that's also a very defensive sector that historically is very uncorrelated to AI," he said.

He noted that healthcare companies were increasingly adopting AI in areas such as medical tools and diagnostics, with the sector moving from challenges towards growth opportunities.

Miller, however, cautioned against treating traditional defensive sectors such as consumer staples as automatically attractive, arguing that elevated valuations had reduced their appeal.

"Expensive defensives I don't think are defensive," he said.

He suggested investors focus on companies with strong balance sheets, quality earnings and healthy free cash flows.

Goldman Sachs executive outlines market outlook

Outlining his preferred investment strategy, Miller said: "I think the S&P 500 excluding AI is the trade."

He cited attractive valuations and earnings growth prospects as reasons for his preference.

Looking ahead, Miller identified employment, inflation, corporate earnings and the US Federal Reserve's December 9 policy decision as key factors that could influence markets.

On the outlook for US stocks towards the end of the year, he expressed cautious optimism, anticipating a modest rally that he described as a "relaxed Santa Rally".