Goldman Sachs says US tech stocks' valuations stretched but no bubble yet

Investors may need to moderate their return expectations, Peter Oppenheimer of Goldman Sachs had recently said.

Goldman Sachs has allayed investors' concerns of a bubble in the mega tech shares in the US equity markets, stating that the high valuations in the space does not necessarily mean a bubble.

“Valuations of the technology sector are becoming stretched but not yet at levels consistent with historical bubbles,” Chief Global Equity Strategist Peter Oppenheimer has said in his latest note.

US Tech Bubble Fears

According to Bloomberg, the Nasdaq 100 is currently trading at 28 times the forward earnings as compared to a 10-year average of 23. The high valuations of US tech shares have been a concern for many market participants. News agency Reuters quoted Brian Krawez, president of Scharf Investments, who said the fears are misplaced, as of now.

"I think right now in terms of the market, there are some people who are concerned and you're hearing some people talk about sort of a bubble and a crash. But I don't think that the market sentiment is overly negative yet or overly euphoric. In fact, I think if you kind of look at the internet analog, we're not quite there in terms of the craziness of the internet era, but we're certainly getting close," Brian Krawez said.

Temper Expectations

However, investors may need to moderate their return expectations, Peter Oppenheimer had recently said.

"...valuations across credit and bond markets are already elevated, and US equity valuations particularly so. While that doesn’t necessarily mean US stocks are in a bubble—high valuations mostly reflect strong fundamentals, including higher margins and returns on equity (ROE)—investors should expect more moderate annual returns," Goldman Sachs note said.

According to Oppenheimer, high valuations mostly reflect "strong fundamentals", including higher margins and returns on equity (RoE). “The issue for investors is whether the US can maintain its premium ROE relative to other markets,” Oppenheimer said in its September report.

According to Oppenheimer, the high concentration of tech companies in US stock market certainly makes a case for diversification, even as he set aside fears of a bubble building up. He called the US stock market "unusually concentrated" towards a handful of large technology companies, though he attributed it to the "success of a few large companies that manage to dominate specific sectors". "Even so, higher concentration may be a risk for investors," Oppenheimer added.

Headwinds for US Economy

According to Goldman Sachs, the US equity markets are facing headwinds that were 'not present' during past structural bull runs, such as elevated valuations, higher interest rates and inflation. A slower pace of growth in international trade and concerns around US economy too have emerged, along with a high government spending in America.

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