Top tech stocks are trading at the biggest relative discount in over 6 years with earnings set to spark momentum, Goldman Sachs says

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  • Mega-cap stocks are at their cheapest valuation in six years, Goldman Sachs wrote.

  • Meanwhile, they’re earnings season will outperform the typical S&P firm.

  • The sector is likely to keep outperforming the index through at least 2025.

Mega-cap tech stocks are not only set to reverse their current downturn, they’re likely to continue outperforming the broader market for years to come, Goldman Sachs analysts wrote in a note published Sunday.

While the sector’s seven leading equities have dropped 20% from their July peak, they’re now trading 1.3x higher than their price, earnings per share, and long term growth (PEG), below the average S&P stock’s 1.9x ratio. It’s a level reached only five times in the past decade, and the largest discount since 2017.

“As recently as January, the group commanded an 18% PEG premium to the median stock (2.2x vs. 1.9x). If consensus growth estimates remain unchanged and the mega-cap tech stocks trade back to their average PEG of the last decade (0.84x), the group would appreciate by 20%,” Goldman said.

This could happen soon, with the upcoming earnings season likely to be a possible catalyst for more gains in the sector. For two-thirds of the earnings seasons since 2016, leading tech equities have led earnings by three percentage points.

And today’s top tech names — Apple, Microsoft, Amazon, Google, Nvidia, Tesla, and Meta, also known as the “Magnificent Seven” — are expected to see 11% sales growth in the upcoming third quarter results, compared to an estimated 1% for the aggregate S&P 500.

Not only could this boost the tech industry back to 2023 highs, it could help the sector continue outpacing the average S&P 500 stock throughout the next few years.

That’s as superior sales growth has been a long-standing trend for mega-cap tech, even before artificial intelligence hype drove a massive surge in their share price. For instance, from 2013 to 2019, the sector increased at a 15% compound annual growth rate, compared to 2% for the rest of the S&P.

Through 2025, the top seven stocks are projected to grow nine percentage points faster than the remainder of the index.

Apart from high hopes for a strong earnings season, mega-cap tech stocks should also rebound amid moderation in the US Treasury market. The sector largely fell off as 10-year yields have shot past 4.6%, but Goldman estimates they will drop back down to 4.3% in the fourth quarter.

“The divergence between falling valuations and improving fundamentals represents an opportunity for investors,” the note said.

Wedbush Securities’ Dan Ives holds similar optimism for the tech sector. In a recent note, referred to the upcoming earnings as a “sneak preview” of tech’s future growth. Yet, not everyone believes the rally is sustainable, and some commentators have warned that sticky inflation and fading AI hype will disrupt further gains in the sector.

Read the original article on Business Insider

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