Big Tech-Led Rally Is Unlike Past Bubbles, Goldman Strategists Say

A monitor displays S&P 500 at the New York Stock Exchange.

(Bloomberg) -- The S&P 500's advance to a record high — fueled by a small group of supercharged technology stocks — doesn't resemble past bubbles, according to strategists at Goldman Sachs Group Inc.

Stocks with an enterprise value-to-sales ratio of above 10 account for 24% of total US equity market capitalization, versus 28% during 2021 and 35% during the tech bubble, strategist David Kostin wrote in a note dated March 1. However, the breadth of “extreme valuations” is far more contained with the number of stocks trading at those multiples down sharply from the peak in 2021, he added.

“This time is different,” Kostin said. “Unlike the broad-based ‘growth at any cost' in 2021, investors are mostly paying high valuations for the largest growth stocks in the index. We believe the valuation of the Magnificent 7 is currently supported by their fundamentals.”

The so-called Magnificent Seven — comprising Apple Inc., Microsoft Corp., Nvidia Inc., Amazon.com Inc., Meta Platforms Inc., Alphabet Inc. and Tesla Inc. — have powered the S&P 500 to all-time peaks this year, partly fueled by the frenzy around artificial intelligence. The gains have left strategists scrambling to lift their end-2024 targets for the benchmark index just two months into the year.

Bank of America Corp. strategist Savita Subramanian became the latest to boost her S&P 500 forecast to 5,400 points from 5,000 — implying a gain of about 5% from Friday's close. Her target is now among the highest on Wall Street, and is based on bullish signals around stronger earnings growth and “surprising” profit margin resilience.

Other strategists such as John Stoltzfus at Oppenheimer Asset Management have also brushed off the risk from stretched positioning and technical indicators. The bullish momentum is driven by fundamentals that are “too strong to argue against” and are reflected in data showing resilience in business, consumer spending and jobs growth, Stoltzfus wrote in a note.

“There's likely room for a further broadening of this year's stock market rally and opportunity to see equities further climb the proverbial wall of worry,” the strategist said.

--With assistance from Jessica Menton.

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