Recent turbulence in the tech sector, marked by the Nasdaq 100’s largest monthly decline this year, may pave the way for an upswing in US technology stocks, as highlighted by strategists at Goldman Sachs Group Inc.
These experts argue that the sell-off has driven tech stocks to historically low valuations, presenting a lucrative opportunity for investors, particularly in light of the ongoing rise in earnings estimates.
One significant metric cited by Goldman Sachs is the Price-to-Earnings Growth (PEG) ratio, which gauges the price relative to earnings and long-term growth.
Their analysis revealed that the PEG ratio for the seven largest tech stocks stands at 1.3, contrasting with the median S&P 500 stock’s ratio of 1.9. This significant difference represents the most substantial discount observed since January 2017, a level witnessed only five times in the last decade.
Strategists Cormac Conners and David Kostin emphasized the potential presented by the divergence between declining valuations and improving fundamentals, underscoring it as a lucrative prospect for investors, as conveyed in a note dated Oct. 1.
While the year commenced with a robust rally in tech stocks propelled by excitement surrounding artificial intelligence, the optimism has waned in recent months due to mounting concerns that the Federal Reserve may sustain higher interest rates for an extended period.
Consequently, the tech-heavy Nasdaq 100 witnessed its most substantial monthly decline since December 2022, prompting a reevaluation of investment strategies.
As the focus shifts to third-quarter earnings, expectations for the tech sector appear relatively positive in comparison to the broader market. A Citigroup Inc. index illustrates that profit upgrades for tech stocks continue to outweigh downgrades.
Analysts anticipate a 4.3% increase in technology earnings for the third quarter compared to last year, based on data compiled by Bloomberg Intelligence.
Goldman Sachs strategists further argued that historical trends augur well for the tech sector’s performance during the reporting season.
Over the years, the most extensive tech stocks have outperformed the equal-weighted S&P 500 index more than 60% of the time since 2016, typically by three percentage points, even when forecasts have been optimistic in the lead-up to the season.
On a broader scale, David Kostin at Goldman Sachs has shifted towards a more bullish outlook on US stocks. He anticipates the S&P 500 to close 2023 at 4,500 points, about a 5% increase from current levels, foreseeing additional upside over the next 12 months if the US can evade a severe recession.
However, this optimistic stance is at odds with the viewpoint of Lori Calvasina, an RBC Capital Markets LLC strategist, who believes that weakness in US stocks will persist.
She suggests that there’s room for investors to adopt a more pessimistic outlook, citing readings from the AAII Investor Sentiment Survey. Despite a sharp decline in net bullishness from the sentiment index since mid-August, Calvasina notes that it has not yet reverted to levels indicative of capitulation.