Tech Stocks Not in Bubble, But Earnings Growth Raises Concerns

Goldman Sachs has released a report that suggests technology stocks may not be in a valuation bubble, but there could be an 'earnings bubble' as investors question 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. However, forward implied growth remains well below levels seen at the peak of the dot-com era.

Goldman Sachs credits the shift to 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.

The report also notes that the US equity market, dominated by hyperscalers, has seen a sharp decline in free-cash-flow yield relative to more value-orientated markets such as Europe.