Goldman Sachs strategist Peter Oppenheimer stated that concerns about a bubble in US technology stocks are premature. He pointed out that the record-breaking rally in tech stocks has been accompanied by robust earnings growth, whereas in previous bubble periods, market advances were primarily driven by speculative behavior.
Oppenheimer and his team wrote in a report: "Valuations in the technology sector have moved beyond normal ranges, but have not yet reached levels consistent with historical bubble periods." However, the strategist reiterated his recommendation that investors should diversify to mitigate risks from the narrow market rally in US stocks and intensifying competition in the artificial intelligence sector.
Several technology giants, including NVIDIA (NVDA.US), Broadcom (AVGO.US), and Microsoft (MSFT.US), have propelled US markets to record highs as investors remain optimistic about their sustained earnings growth and productivity improvements from artificial intelligence. While recent indicators from financial institutions like Goldman Sachs and Barclays show that investors remain bullish on further stock gains, some market participants have become cautious about returns from massive investments in the AI sector.
On Tuesday, the tech-heavy NASDAQ 100 index declined following reports that Oracle's (ORCL.US) cloud computing business margins fell short of market expectations. Meanwhile, data indicates that mentions of "technology" and "bubble" in news coverage have increased significantly in recent weeks.
Valuations are also rising. The NASDAQ 100 index trades at a price-to-earnings ratio of 28 times forward earnings, compared to its 10-year average of 23 times. The global composite index excluding the US has a P/E ratio of 15 times.
Oppenheimer explained that bubbles occur when companies are valued on average above the expected value of their future cash flows. He noted that this time, the best-performing tech stocks "have exceptionally strong balance sheets." Additionally, he wrote that broadly rising valuations in equity and credit markets suggest "this is not simply about a bubble in technology, but more related to overall conditions such as low interest rates, high global savings rates, and long-term economic cycles."
Oppenheimer stated: "This does indeed make them vulnerable to adjustments when confidence in economic growth expectations wavers, but such a scenario is unlikely to be caused solely by the bursting of a technology sector bubble."
The strategist took a contrarian stance in 2024, recommending that investors shift funds from expensive US stocks to underperforming international markets. This year, the S&P 500 has underperformed the MSCI World Index (excluding US markets).
