Tech stocks experience a "golden dip"? Goldman Sachs: A rare buying opportunity not seen in decades has arrived

Goldman Sachs believes that there is currently a rare buying opportunity in US tech stocks.

At present, the relative performance of tech stocks compared to the broader market is experiencing one of the worst stretches in nearly half a century.

The team led by Peter Oppenheimer, Chief Global Equity Strategist at Goldman Sachs, pointed out that as the driving force behind the stock market rally increasingly comes from countries, sectors, and style factors outside of the tech sector, investors may now actually be facing the best opportunity in decades to buy heavily beaten-down tech stocks.

Goldman Sachs stated: "From a relative perspective, the US stock market is no longer as expensive as it once was. Despite a correction, its earnings performance remains strong."

For example, the team noted that the PEG valuation gap between the US market and other global regions has clearly reset. PEG, or price-to-earnings-growth ratio, compares the P/E ratio to expected earnings growth over the coming years. For many years, the "American exceptionalism" narrative dominated the market, leading US equity valuations to decouple from the rest of the world.

Now, the PEG ratio for the tech sector is already below that of the overall global market, which Goldman Sachs regards as a new sign of "valuation appeal."

More notably, the current level of pessimism towards the tech sector has caused its rolling PEG to imply expectations of significantly weakened future earnings—levels that are even as low as the post-dot-com bubble trough from 2003 to 2005.

Factors pressuring tech stocks include market worries over continued increases in capex by mega-cap cloud computing companies, as well as the revaluation pressures faced by software and certain tech firms amid the disruption brought by AI technology. At the same time, investors have started to chase after so-called "old economy" companies that were long ignored, such as those in energy, basic resources, chemicals, healthcare, and industrials.

Goldman Sachs strategists believe that the renewed valuation premiums for these sectors are reasonable, but that the punishment of tech stocks is clearly excessive, especially considering their still-robust earnings growth.

For example, the valuations of mega-cap tech companies such as Amazon and Alphabet are now close to the average levels of other S&P 500 constituents.

Goldman Sachs pointed out: "On a global scale, the information technology sector's current P/E ratio is now lower than that of consumer discretionary, consumer staples, and industrial sectors. Unlike most industries, the valuation premium of tech stocks versus historical averages has also dropped sharply."

Even though the market is concerned about rising capital expenditures and lower future investment returns, these tech stocks' return on equity remains high, and earnings revisions are more positive than in any other sector. The result is a record-breaking disconnect between the tech sector's share price performance and its underlying earnings growth.

Goldman Sachs says that only if the credit environment comes under severe strain, or the revenues of mega-cap tech companies fall significantly, will the current capex cycle be truly threatened. So far, however, analyst forecasts for how much these investments will ultimately boost profits have actually increased further in recent weeks.

The Goldman Sachs team also reiterated that they are not worried about a bubble in current tech stocks. They noted that, whether compared to the peak of the 2000 tech bubble or the pre-crash phase of the "Nifty Fifty" bubble in the 1970s, today's tech valuations are much lower.

Moreover, unlike during previous bubbles, there is currently no wave of tech companies rushing to IPOs. Instead, the upcoming tech listings are more likely to provide investors with a basis to make more nuanced distinctions within the sector.

Additionally, Goldman Sachs pointed out that the Iran war has actually provided another reason to buy tech stocks. The firm believes that the longer shipping disruptions in the Strait of Hormuz last, the greater the market's concerns may be about economic growth, and such a "growth shock" could in turn limit further rises in interest rates.

Oppenheimer and his team stated that, given the tech sector's relatively low cash flow sensitivity to economic growth, and the prospects of benefiting if bond yields retreat, tech stocks could even demonstrate stronger defensive characteristics than the market expects in the coming months.