Goldman Sachs Sounds Earnings Bubble Warning on Tech Stocks

Goldman Sachs has sounded a warning about 'earnings bubbles' in technology stocks, despite valuations not appearing to be in bubble territory.

In its Global Strategy Views report, Goldman Sachs noted that while technology valuations have moderated on a price-to-earnings (P/E) basis, implied future growth has been rising. However, forward implied growth remains well below levels seen at the peak of the dot-com era.

The report highlighted a dramatic increase in capital expenditure by leading technology companies, which has eroded their premium cash flows and pushed them towards debt and equity markets for funding. This shift has led to a sharp decline in free-cash-flow yield relative to more value-orientated markets such as Europe.

Goldman Sachs emphasized that the current situation differs significantly from the dot-com era, where valuations reached much higher levels before subsequently declining as stock prices collapsed. In contrast, prices have adjusted more modestly this time around while earnings have remained 'exceptionally strong'. Within technology, software stocks have witnessed a particularly sharp valuation reset, with their global P/E premium falling to around 20 per cent compared to nearly 200 per cent at the beginning of this century.

The report noted that despite earnings growth, concerns over the cyclical nature of hardware and chip businesses and whether their earnings are sustainable have also led these stocks to de-rate.