Goldman Sachs said that the key indicators that reveal when the dot-com bubble of 2000 ended may once again provide useful guidance for investors in the internet plus-related industry.
In recent weeks, as investors turned their attention historically to small-cap stocks, the rise of large tech stocks has suddenly stalled.
Since early July, $Russell 2000 Index (.RUT.US)$it has risen by about 7%, while $S&P 500 Index (.SPX.US)$it has risen only 1%. This is in stark contrast to the advantage of large-cap technology stocks over small-cap technology stocks over the past one, three, five, and ten years.
The only opportunity for large tech stocks to reverse the situation of being far behind the market in July is to remind investors why their long-term performance will be significantly better than the market: strong earnings growth.
David Kostin, a strategist at Goldman Sachs, said in a report last Friday that the second quarter earnings report will show whether the strong performance of large tech stocks this year can be restored.
Kostin said: "Unless there are significant changes in the macro environment, or the second quarter earnings report causes analysts to raise revenue expectations for the next few quarters, the recent trend of small-cap stocks outperforming the market may continue."
$Tesla (TSLA.US)$And.$Alphabet-C (GOOG.US)$ will release its financial report after the close of trading this Tuesday, and investors will be tasting the flavor of the financial report of large technology companies for the first time. Afterwards, $Microsoft (MSFT.US)$will release its financial report on July 30, $Meta Platforms (META.US)$will release its financial report on July 31, $Apple (AAPL.US)$And.$Amazon (AMZN.US)$will release its financial report on August 1.
Raising expectations for future earnings growth is key, as the growth of large tech stocks is slowing down while other companies are accelerating.
A report states that market generally expects the year-on-year revenue growth rates of Amazon, Alphabet, Meta platform, Microsoft and $NVIDIA (NVDA.US)$will decline from 17% in the second quarter to 14% in the fourth quarter. This trend is repeated every year.
Kostin said:"In contrast, the median revenue growth of S&P 500 index component company will accelerate, although the growth rate will slow down."
Earnings expectations for the S&P 500 index and large tech stocks are narrowing.
Kostin believes that analysts' revisions to revenue growth for large tech companies are a key indicator for determining when the 2000 internet bubble will end. This time, it may once again become a useful indicator of investor attention in the unlimited hype of artificial intelligence.
Kostin said:"Revenue revision was a key variable to watch during the Internet boom in the late 1990s, because it ultimately predicted when the trend would continue to reverse."
If the performance of large tech companies exceeds expectations and adjusts their forward sales guidance upwards, the S&P 500 Index will resume its outperformance. Otherwise, small-cap stocks will continue to outperform the market.
The factors driving the recent rebound in small-cap stocks include: accelerating earning growth, slowing inflation, imminent Fed interest rate cuts, and the increasing likelihood of Trump's presidency in 2025.
Editor/ping