Goldman Sachs Rarely Speaks Out: The "Generational Buying Opportunity" in U.S. Tech Stocks Has Quietly Begun

Ask AI · Why does Goldman Sachs see a generational buying opportunity when tech stocks are underperforming?

U.S. tech stocks have recorded the worst relative performance against the broader market in half a century, but Goldman Sachs believes that earnings resilience has not changed, valuations have fallen rapidly, and a “generational buying opportunity” is being opened for investors.

Led by Goldman Sachs Chief Global Equity Strategist Peter Oppenheimer, the team says that on a relative valuation basis, the U.S. stock market no longer looks “expensive,” and after undergoing an adjustment, a repricing window has emerged in the valuation framework.

Multiple relative valuation indicators have shown a “reset.” Market pessimism toward the tech sector is approaching the trough seen after the 2003 to 2005 tech bubble burst, while earnings revisions for the tech sector are still leading other sectors—widening the divergence between stock performance and fundamentals.

Against the backdrop of investors focusing on Middle East developments, oil prices, and intraday tug-of-war in U.S. stock futures, tech stocks are viewed as a potential defensive allocation. If disturbances in the Strait of Hormuz persist, they may trigger a “perceived growth shock” and limit upward interest-rate moves, thereby strengthening the relative attractiveness of the tech sector.

Weakest relative returns in 50 years, valuation reset

Tech stocks’ relative performance versus the broader market has fallen to the weakest range in 50 years, with valuations pulled back to more comparable levels.

One key change is the PEG ratio reverting between the U.S. and other markets.

After years of decoupling driven by the “U.S. exceptionalism” narrative, the PEG gap between U.S. stocks and global markets has been reset. The tech sector’s PEG has fallen below that of the global composite market, and the implied future earnings outlook tracked by tech stocks is “very weak,” reaching levels as low as the 2003 to 2005 trough.

From a horizontal comparison, the price-to-earnings ratio of the global IT sector is below those of consumer discretionary, consumer staples, and industrials, and its relative historical valuation premium has also fallen markedly.

Earnings have not weakened; the divergence between stock prices and fundamentals widens

Tech stocks have not experienced earnings deterioration that matches the valuation downgrades.

Even though the market is concerned about rising capital expenditures and lower future returns, the return on equity of the relevant companies remains high, and earnings expectation revisions for the tech sector are “more positive than for any other sector.”

This has led to a “record gap between earnings growth and market performance” in the tech sector.

But if credit availability faces a severe shock, or if revenues from mega-scale cloud vendors are hit, related investment spending could be reduced. However, in the past few weeks, analysts have instead continued to raise their size expectations for the earnings tailwinds brought by these investments.

Rotation pressures compress tech premiums; mega-scale cloud vendors’ valuations approach the broader market

Recent pricing pressure is partly attributable to two types of concerns: first, market worries about capital expenditures by mega-scale cloud vendors; second, AI-related disruption has hit parts of the tech sector, such as software.

As a result, capital is re-pricing long-neglected “old economy” companies, including energy, basic resources, chemicals, healthcare, and industrials.

The above sectors “should logically command higher valuations,” but the tech sector is being “over-penalized” even as growth remains strong. For example, with mega-scale cloud vendors, valuations have already approached the valuation level of the rest of the S&P 500 components, significantly compressing the tech sector’s premium.

No bubble worries; Middle East disruptions reinforce “defensive attributes” in pricing

There are “no bubble concerns” for tech stocks, and current valuations are still below the levels seen before the 2000 tech bubble and before the “Nifty Fifty” crash of the 1970s.

Unlike in historical bubble phases, the market has not been “flooded” by tech IPOs, and even if new listings occur in the future, they are more likely to be priced based on differentiation within the sector.

Geopolitical factors are also incorporated into the buy case. The Iran conflict provides the “last reason” to buy tech stocks: the longer the disturbances in the Strait of Hormuz persist, the more likely they are to trigger a “perceived growth shock,” thereby limiting upward interest-rate moves.

The Oppenheimer team says that, given that tech sector cash flows are relatively insensitive to economic growth and may benefit from any rebound in Treasury yields, the sector may be more defensive over the coming months or even longer.