Goldman Sachs makes rare statement: The "intergenerational buying opportunity" in U.S. tech stocks has quietly begun
US technology stocks have recorded their weakest performance relative to the broader market in half a century, but Goldman Sachs believes that resilient earnings and rapidly declining valuations are creating a "generational buying opportunity" for investors.
A team led by Peter Oppenheimer, Goldman Sachs’ Chief Global Equity Strategist, stated that US equities are “no longer expensive” in terms of relative valuation, and the adjustment has opened a window for repricing valuations.
Multiple relative valuation indicators have already shown a “reset,” with pessimistic market pricing for the technology sector approaching the trough seen after the 2003–2005 tech bubble burst, while earnings revisions in the tech sector remain ahead of other industries, widening the gap between stock performance and fundamentals.
Against a backdrop where investors are focused on the Middle East situation, oil prices, and tug-of-war trading in US equity futures, tech stocks are deemed a potential defensive allocation. It is believed that if disruptions in the Strait of Hormuz continue, they may trigger a “perceived growth shock” and limit interest rate increases, thus strengthening the relative appeal of the technology sector.
Weakest relative returns in 50 years, valuation system reset
The relative performance of tech stocks against the broader market has fallen to its weakest level in 50 years, with valuations pulled back to more comparable levels.
A key change is the return of PEG ratios between the US and other markets.
After years of decoupling due to the “US exceptionalism” narrative, the PEG difference between US equities and global markets has reset. The tech sector’s PEG is now lower than the global composite market, with the implied future earnings outlook for tracked tech stocks “very weak,” at levels seen in the 2003–2005 trough.
From a horizontal comparison, the global IT sector’s price-to-earnings ratio is now lower than that of discretionary, staple, and industrial sectors, and its historical valuation premium has also seen a significant decline.
Earnings have not weakened, divergence between stock prices and fundamentals widens
Tech stocks have not experienced earnings deterioration matching the valuation downward revisions.
Despite market concerns over rising capital expenditures and future returns dropping, relevant companies’ return on net assets remains high, and the earnings revisions for the tech sector are “more positive than any other sector.”
This is resulting in a “record gap between earnings growth and market performance” in the tech sector.
However, if credit availability faces major shock, or income for hyperscale cloud providers is hit, related investment expenditures could be reduced. Still, analysts’ expectations for the earnings tailwind generated by these investments have “continued to be revised upward” in recent weeks.
Rotation squeezes tech premium, hyperscale cloud provider valuations approach market average
Recent pricing pressure is partly attributed to two worries: first, market concerns over capital expenditures by hyperscale cloud providers; second, AI-driven disruption hitting some software and other tech stocks.
As a result, capital has repriced “old economy” companies that had long been overlooked, including sectors like energy, basic resources, chemicals, healthcare, and industrials.
These sectors “deserve higher valuations,” but the technology sector, despite strong growth, is being “overly punished.” For example, valuations of hyperscale cloud providers are now close to the levels of other S&P 500 components, and the tech sector’s premium has been significantly compressed.
No concerns over a bubble, Middle East disruptions reinforce 'defensive pricing'
There are “no concerns about a bubble” in tech stocks; current valuations are still lower than before the 2000 tech bubble and the 1970s “Nifty Fifty” crash.
Unlike historical bubble periods, the market is not flooded with tech IPOs, and even if new listings emerge in the future, they are more likely to provide grounds for differentiated pricing within the sector itself.
Geopolitical factors are also included in the buying logic. The Iran war provides “the last reason” to buy tech stocks: the longer disruptions in the Strait of Hormuz continue, the greater the likelihood of causing a “perceived growth shock” that will limit rate hikes.
The Oppenheimer team states, given that tech sector cash flow is relatively insensitive to economic growth and may benefit from any rebound in Treasury yields, this sector could be more defensive in the next few months.
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