Goldman Sachs Sees Earnings Bubble in Tech Stocks
Goldman Sachs has released a report that warns of an 'earnings bubble' in technology stocks, but notes that there is no valuation bubble. The report states that despite rising growth expectations, technology valuations have moderated on a price-to-earnings (P/E) basis.
The report also notes that implied future growth remains well below levels seen at the peak of the dot-com era, and that the sector's 10-year compound annual growth rate of earnings has accelerated beyond peaks seen around 2000. This shift is due in part to a dramatic increase in capital expenditure by leading technology companies.
According to Goldman Sachs, major technology companies benefited from rising demand for software and cloud computing while remaining relatively capital-light after the global financial crisis. However, the introduction of ChatGPT led to an 'explosion in capex' among hyperscalers, eroding their premium cash flows and pushing them towards debt and equity markets for funding.
The report also notes that concerns about future returns generated by this spending have resulted in a de-rating of dominant technology companies. The five biggest stocks in the US now have a P/E ratio only marginally above the other 495 stocks in the S&P 500 after consistently trading at a premium since 2017.