Published: March 4, 2024 at 6:37am ET
While the euphoria has similarities to previous waves, there are some key differences between this year’s tech stock rally and the rally in 2021, according to Goldman Sachs’ top stock market strategist.
In a note to clients, David Kostin said that companies with enterprise value-to-sales ratios of 10 or higher account for 24% of U.S. stock market capitalization, but by 2021 they will account for 28%, compared to high-tech companies in the late 1990s. He said it accounted for 35%. bubble.
but…
While the euphoria has similarities to previous waves, there are some key differences between this year’s tech stock rally and the rally in 2021, according to Goldman Sachs’ top stock market strategist.
In a note to clients, David Kostin said that companies with enterprise value-to-sales ratios of 10 or higher account for 24% of U.S. stock market capitalization, but by 2021 they will account for 28%, compared to high-tech companies in the late 1990s. He said it accounted for 35%. bubble.
But Kostin points out that the number of stocks with these high valuation ratios is decreasing very rapidly. “Unlike the widespread ‘growth at all costs’ of 2021, investors are primarily paying high valuations for the largest growth stocks in the index. This dynamic looks more like a tech bubble than 2021. However, in contrast to the late 90s, we believe Magnificent 7’s valuation is now supported by its fundamentals,” he said, referring to Microsoft’s grouping. .
MSFT
,
apple
AAPL
,
Nvidia
NVDA
,
alphabet
Google
,
Amazon.com
AMZN
,
meta platform
Meta
and tesla
TSLA
.
Another big difference between now and 2021 is the cost of capital. The S&P 500 SPX’s implied weighted average cost of capital fell to 3.8% in 2021 compared to the current 5.7%. As a result, investors have begun to focus on profitability. This is another difference from his 2021 experience, with small-cap stocks underperforming due to higher cost of capital.
They expect the cost of capital to remain above the 10-year average, meaning valuations for small-cap, unprofitable growth stocks are unlikely to return to 2021 levels, Kostin said. says.