Tech Stocks Face Earnings Bubble Warning from Goldman Sachs

Goldman Sachs has sounded an alarm about the tech sector, warning that it may be in an 'earnings bubble' rather than a valuation bubble. Despite rising growth expectations, investors are questioning whether strong earnings can be sustained amid a surge in capital expenditure by leading tech companies.

The report notes that technology valuations have moderated, particularly on a price-to-earnings (P/E) basis. However, implied future growth has been rising, and forward implied growth remains well below levels seen at the peak of the dot-com era.

One key driver of this concern is the dramatic increase in capital expenditure by leading technology companies. According to Goldman Sachs, for about a decade after the global financial crisis, major tech companies benefited from rising demand for software and cloud computing while remaining relatively capital-light.

However, the introduction of ChatGPT was followed by an 'explosion in capex' among hyperscalers. This increased spending has eroded their premium cash flows and pushed them towards debt and equity markets for funding, according to the report.