Goldman Sachs has stated that the recent sharp sell-off in Japanese artificial intelligence (AI) related stocks has created a buying opportunity, as strong corporate earnings could rekindle investor interest in semiconductor shares.

Bruce Kirk, Goldman Sachs' chief Japan equity strategist, noted that the recent market correction has lowered the bar for earnings expectations. This has positioned many AI-linked stocks at a level where positive earnings surprises could have a more significant impact on share prices.

"As long as you don't foresee a major deterioration in the geopolitical situation, this level looks like a good time to add some positions," Kirk said in an interview. "We do not believe the AI investment thesis is invalid."

Kirk's bullish commentary comes as global semiconductor stocks are undergoing a bout of selling, impacting major AI beneficiaries in Japan, South Korea, and Taiwan. Investors are questioning whether high valuations and the AI investment boom can be sustained. Additional factors, such as overcrowded positioning, rising corporate debt, and the increasing strength of Chinese competitors, have further dampened sentiment.

Japan's tech-heavy Nikkei 225 Index surged approximately 44% from the start of the year to its June peak, but has since retreated by 14%. Some of the market's best performers, including Kioxia Holdings and Furukawa Electric, have fallen by at least 40% over the same period.

However, some Wall Street traders suggest that the unwinding of the global AI momentum trade may be nearing its end. UBS's trading desk indicated last week that the sell-off might be close to finishing. Meanwhile, Bank of America's trading desk has advised clients to buy US momentum stocks, arguing that current valuations are attractive.

Kirk expects the market's focus to shift back to fundamental company performance. "Ultimately, it all comes down to earnings," he said. "Strong earnings data should allow investors to refocus on the AI earnings growth story at levels well below the end of June."

Japan's earnings season kicks off in full this week, with major chip-sector players like semiconductor testing equipment maker Advantest, Tokyo Electron, and Kioxia all set to report their first-quarter results.

Goldman Sachs estimates that, based on market forecasts, first-quarter net profit for companies in the Topix Index (excluding highly volatile SoftBank Group) with fiscal years ending in February or March will grow approximately 26% year-on-year. A significant portion of this earnings growth is expected to come from AI-related companies.

Nevertheless, Kirk cautioned that short-term market volatility is likely to persist due to still-crowded investor positioning. According to Goldman Sachs' prime brokerage data, total and net hedge fund exposure to the Japanese market, as a percentage of total holdings, is currently above the 98th percentile of the five-year range, representing historically extreme levels.

Additionally, Goldman Sachs last week raised its 12-month forward forecast for the Topix Index, citing an adjustment to its assumption of a weaker yen. The yen is currently trading near 40-year lows against the US dollar, which is boosting the profitability of Japanese export-oriented companies.