Goldman Sachs sees healthcare as the next leg of the artificial intelligence trade, as investors rotate out of the technology stocks that have driven markets for much of the year.

Lou Miller, the bank's global head of custom basket trading, told Goldman Sachs' The Markets podcast that the US midterm elections could accelerate a rotation under way. Investors had begun moving towards defensive positions before the vote, he said, and data showed beta-adjusted net exposure at very low levels compared with history.

Miller said data-centre stocks have fallen 36 per cent from their highs earlier this year, while memory stocks are down 42 per cent, optical networking stocks 46 per cent and NeoCloud stocks 57 per cent. The multiple on the data-centre trade is about half what it was in June, which Miller said lowers the bar for positive surprises.

Healthcare seen as the next AI theme

Miller identified healthcare as a potential beneficiary of the next phase of AI adoption, saying it could be among the few sectors with accelerating earnings growth next year. Healthcare companies are increasingly using AI in medical tools and diagnostics, he said.

"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," Miller said.

He cautioned against traditional defensives such as consumer staples, where elevated valuations have reduced their appeal, urging a focus on strong balance sheets, quality earnings and healthy free cash flows.

His preferred strategy was the S&P 500 excluding AI. He named employment, inflation, corporate earnings and the Federal Reserve's 9 December policy decision as the key market drivers, and expressed cautious optimism for a modest year-end rally, which he called a "relaxed Santa Rally."