The tech industry is on the brink of a potential resurgence, according to veteran Goldman Sachs tech analyst Kash Rangan. At the Goldman Sachs Communacopia and Technology Conference, Rangan highlighted a "magical moment" for tech stocks that could fuel the sector to new heights. However, this magical moment requires two key factors: a series of interest rate cuts by the Federal Reserve and a movement of innovation, specifically in artificial intelligence (AI).

Rate Cuts and AI Innovation

Rangan detailed that tech stocks need more than the current 11% growth rate to reclaim their past reign. A combination of cutting-edge innovation and lower interest rates could cause growth rates of 20% to 30%. The Federal Reserve's anticipated rate cuts would reduce borrowing costs, making it easier for companies to invest in innovation and expand their operations.

“We have to get the industry back from an 11% growth rate to 20%-30%, and to do that, new innovation has to happen,” Rangan stated. He emphasized that AI is at the center of this transformation, particularly in areas like upselling customers and monetizing new technology. When combined with a more favorable interest rate environment, he predicted, "magic happens."

Why AI Is Key to Tech's Future

Rangan’s bullish stance on companies like Microsoft (MSFT) and Salesforce (CRM) hinges on their ability to lead the charge in AI-driven innovation. Tech giants are already pushing the boundaries of what AI can do, especially in business applications. Microsoft has been integrating AI into its enterprise software offerings, from its Azure cloud platform to AI-powered tools for businesses. Similarly, Salesforce is set to introduce AI-powered digital agents that will automate customer service and charge businesses based on usage, unlocking new revenue streams.

According to Rangan, companies need to capitalize on AI advancements to generate new growth and profitability. AI’s ability to drive upselling and optimize business processes offers unlimited potential, especially as companies seek to monetize these tools in real time. AI with lower rates could be the perfect storm for this tech boom.

Fed’s Rate Cuts

The Fed’s rate decision on September 18 will be crucial for the broader market, particularly for tech. Goldman Sachs’ chief economist Jan Hatzius told Yahoo Finance that a 25-basis-point cut is likely, though he wouldn’t rule out a 50-basis-point reduction given the current high level of the Fed funds rate.

Lower rates could significantly ease pressure on tech companies by reducing borrowing costs and creating a more favorable environment. Hatzius noted that the current Fed funds rate, at 5.25% to 5.5%, is the highest among G10 countries, making a cut essential to stimulating economic activity. Tech companies could benefit significantly, as lower rates would free up capital for research, development, and further innovation.

Innovations on the Horizon

The future of AI innovation seems promising. Salesforce is preparing to launch AI-powered digital agents that will automate interactions, such as customer service, and charge businesses per conversation. This breakthrough in monetization is expected to provide new growth opportunities for Salesforce and other companies utilizing AI for automation.

On the hardware side, AMD continues to unveil groundbreaking AI chips, with its chair and CEO, Dr. Lisa Su, revealing plans for a series of new AI chips through 2026. According to Su, the AI cycle is “much larger” than previously expected, pointing to an even broader scope of technological disruption and market growth.

Despite the overall optimism, tech stocks have faced significant headwinds lately. The Nasdaq has shed about 5% in September amid profit-taking in AI-driven trades and concerns over slowing economic growth. Heavy hitters like Nvidia (NVDA) and AMD (AMD) have seen steady declines, with Nvidia down 11% and AMD losing 7% month-to-date. Investors are worried about a potential AI spending slowdown, particularly after Nvidia's mixed Q2 earnings.

Still, Goldman Sachs remains positive on these stocks. Analyst Toshiya Hari expressed confidence in Nvidia's long-term outlook, noting that demand for accelerated computing remains strong across the enterprise and even sovereign state sectors. The broadening demand profile, particularly in AI-driven industries, suggests that the current slowdown may only be temporary.

The Road Ahead

The potential for AI to generate new revenue streams is undeniable, but the sector will need lower interest rates to fuel a sustainable surge. Whether this magical moment materializes will depend on the Federal Reserve’s willingness to cut rates and tech companies' ability to deliver on the AI promises they’ve made. If both factors align, investors could witness a significant rally in tech stocks, with growth rates soaring past current expectations.