Goldman Sachs Sounds Earnings Bubble Alarm in Tech Sector

Goldman Sachs has found no signs of a valuation bubble in technology stocks despite rising growth expectations. However, the investment bank warns that there could be an 'earnings bubble' as investors question whether the sector's strong earnings growth can be sustained.

In its Global Strategy Views report, Goldman Sachs notes that while technology valuations have moderated 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.

The report attributes this shift to a dramatic increase in capital expenditure by leading technology companies, particularly after the introduction of ChatGPT. This 'explosion in capex' among hyperscalers has eroded their premium cash flows and pushed them towards debt and equity markets for funding, according to Goldman Sachs.