Goldman Sachs Sees Earnings Bubble in Tech

Goldman Sachs has published a report that casts doubt on whether technology stocks are in a valuation bubble, despite rising growth expectations. However, the investment bank warns of an 'earnings bubble', suggesting investors may be questioning whether the sector's strong earnings growth can be sustained.

The report notes that while technology valuations have moderated, particularly on a price-to-earnings (P/E) basis, implied future growth has been rising. Forward implied growth remains well below levels seen at the peak of the dot-com era, even as the sector's 10-year compound annual growth rate of earnings has accelerated beyond the peaks seen around 2000.

Goldman Sachs points out that major technology companies have dramatically increased their capital expenditure in recent years. This shift has eroded their premium cash flows and pushed them towards debt and equity markets for funding, according to the report.

The introduction of ChatGPT led to an 'explosion in capex' among hyperscalers, which has resulted in a sharp decline in free-cash-flow yield relative to more value-orientated markets such as Europe. Concerns about future returns generated by this spending have also resulted in a de-rating of dominant technology companies.