Why Goldman Sachs thinks there may be an ‘earnings bubble’ in tech?
Report says while technology valuations have moderated, implied future growth has been rising
Goldman Sachs' report suggests that while technology stocks may not be in a valuation bubble, there could be an earnings bubble emerging in the sector. Despite moderation in valuations, particularly on a price-to-earnings basis, the implied future growth among tech companies remains high. This shift is driven by a significant increase in capital expenditure by leading technology companies, especially after the introduction of ChatGPT.
The report highlights that the US equity market, dominated by hyperscalers, has experienced a sharp decline in free-cash-flow yield due to increased spending. Concerns about the sustainability of this spending have led to the de-rating of dominant technology stocks, with their P/E ratio now only marginally above the S&P 500. However, Goldman Sachs notes that this situation is different from the dot-com era, as prices have adjusted modestly while earnings have remained exceptionally strong.
The report also points out a shift in technology leadership from software to hardware, with memory and chip companies benefiting from strong earnings growth. Despite this growth, the cyclical nature of these businesses raises concerns about the sustainability of their earnings.
Written by urgent.news from Hindu BusinessLine's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
