Despite the significant growth and investor interest in artificial intelligence stocks, Goldman Sachs analysts said Thursday the sector is not in a speculative bubble, unlike previous technology booms such as the late 1990s internet bubble.
Yet the analysts highlight the importance of diversification given the high concentration risk among leading tech companies, often referred to as the "Magnificent Seven."
The extraordinary performance of tech stocks in recent years has been justified by their earnings, said Goldman stategist Peter Oppenheimer.
Global tech earnings per share have risen by approximately 400% since the global financial crisis, while non-tech sectors achieved a comparatively modest 25% increase, he said.
"The technology sector is not in a bubble and is likely to continue to dominate returns," Oppenheimer said.
Tech Valuations Remain Reasonable: Goldman Sachs
Goldman Sachs highlights a key difference between the AI-driven rally and previous market bubbles.
The valuations of major tech players are significantly lower than those of tech stocks during past speculative phases.
For instance, while the Magnificent Seven — Microsoft Corp. (NYSE:MSFT), Apple Inc. (NASDAQ:AAPL), NVIDIA Corp. (NASDAQ:NVDA), Alphabet Inc. (NASDAQ:GOOG) (NASDAQ:GOOGL), Amazon Inc. (NASDAQ:AMZN), Meta Platforms Inc. (NASDAQ:META) and Tesla, Inc. (NASDAQ:TSLA) — account for over 30% of the S&P 500's market weight (compared to 19% for tech giants in the 2000s), they trade at nearly half the forward price-to-earnings (P/E) ratio seen in the prior dot-com bubble.
| Company | S&P 500 Weight (%) | Market Cap ($bn) | Forward P/E | R&D (% of Revenue) |
|---|---|---|---|---|
| Apple | 7.3 | 3,387 | 26.5 | 7.7 |
| Microsoft | 6.6 | 3,043 | 25.7 | 9.4 |
| NVIDIA | 5.7 | 2,649 | 24.1 | 13.2 |
| Amazon | 4.0 | 1,850 | 25.4 | 2.5 |
| Alphabet | 3.9 | 1,808 | 16.6 | 2.0 |
| Meta Platforms | 2.4 | 1,118 | 19.2 | 5.5 |
| Tesla | 1.4 | 672 | 55.4 | 4.9 |
| Magnificent 7 | 31.3 | 14,527 | 23.9 | 5.0 |
In contrast, tech giants during the 2000s dot-com bubble were trading at much higher multiples. Cisco Systems, for example, had a forward P/E of 101.7, while Intel's was 42.1, significantly inflating their valuations relative to the broader market.
| Company | S&P 500 Weight (%) | Market Cap ($B) | Forward P/E | R&D (% of Revenue) |
|---|---|---|---|---|
| Microsoft | 4.5 | 581 | 53.2 | 19.2 |
| Cisco Systems | 4.2 | 543 | 101.7 | 17.5 |
| Intel | 3.6 | 465 | 42.1 | N/A |
| Oracle | 1.9 | 245 | 84.6 | N/A |
| IBM | 1.7 | 218 | 23.5 | 28 |
| Lucent Technologies | 1.6 | 206 | 37.9 | N/A |
| Nortel Networks | 1.5 | 199 | 86.4 | N/A |
| 2000 Bubble Leaders | 19.0 | 2,457 | 52.0 | N/A |
Diversification: Key To Reduce Major Volatility Events
The Goldman Sachs equity team is flagging the concentration risks that come with this tech dominance.
When a few stocks dominate market returns, the potential for "stock-specific mistakes" increases, exposing the broader market to severe corrections, Oppenheimer said. For instance, before the July market correction, the Magnificent Seven stocks were responsible for about 50% of the S&P 500's total returns for the year.
"A market that becomes dominated by a few stocks becomes increasingly vulnerable to either disruption or anti-trust regulation," he said.
A risk also exists that heightened competition and new entrants into the AI space could compress margins and slow growth for the market leaders.
Goldman Sachs recommends seeking opportunities beyond the tech behemoths, particularly in smaller tech companies and sectors tied to infrastructure spending, which may benefit from AI advancements.
The growth of infrastructure capex could boost old-economy industries that incorporate AI technologies into their operations, the firm said.
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