Goldman Sachs strategists contend that the current market rally, particularly in leading tech companies, is not a bubble despite similarities like rising valuations and market concentration. They argue that appreciation is driven by fundamental growth rather than irrational speculation, and that elevated valuations are a broader market phenomenon influenced by low interest rates, high global savings, and an extended economic cycle. Goldman identifies competition within the AI sector as the primary risk, not current valuations, and advises investors to diversify beyond concentrated tech, anticipating a broadening of returns into sectors like capital goods and energy as the tech boom matures.
Need to Know Goldman Sachs on the one thing that could turn the rally into a bubble Competition is the biggest risk to the AI techboom. Stocks look ready to bounce back from Tuesday’s selloff that was driven largely by concern around big tech and AI spending, a worry also echoed in the early hours in a Bank of England report. But is a bubble brewing? Goldman Sachs strategists take that topic to task in our call of the day, where they argue the bull run for stocks and march higher for leading tech companies isn’t ready to hit a wall yet. “History suggests that bubbles are often driven by exuberance that builds around a transformative technology, attracting investors, capital and new entrants. Typically, bubbles exhibit rapidly rising asset prices, extreme valuations and significant systemic risks driven by increased leverage,” a team led by Peter Oppenheimer, chief global equity strategist at the bank, told clients in a Wednesday note. They acknowledge elements of investor behavior that have similarities with past bubbles, such as rising valuations, high market concentration and the emergence of so-called vendor financing. Concerns over circular financing strategies by AI deals for big tech have been rattling plenty of cages lately. Oppenheimer and his team see three big differences between past bubbles and what investors are seeing now. They first address price appreciation concerns, but say that won’t alone drive a bubble. For example, defense stocks have generated hefty returns this year, but without bubble fears attached. “Ultimately, bubbles develop when there is a combined surge in stock prices and valuations to an extent that the aggregate value of companies associated with the innovation exceeds the future potential cash flows that they are likely to generate,” said Oppenheimer and his team. They also argue that strong appreciation for leading companies up to now has been driven by “fundamental growth, rather than irrational speculation about future growth.” “Most of the profits in the technology sector have been generated by companies in the U.S. (largely explaining the success of the U.S. equity market over the past fifteen years), but the dominant companies have enjoyed staggering profit growth over the past fifteen years and have particularly strong balance sheets,” said Oppenheimer and his team. A footnote to that they add: the current rally is “greatly dependent” on earnings momentum continuing. Goldman strategists also argue it’s not just tech — most equity markets are trading at high valuations on a historical basis, as well as credit. So rather than a tech bubble, investors are looking at consequences of low interest rates, high global savings and an “extended economic cycle that has pushed up the value of all risk assets.” If growth confidence fades, markets could correct, but a tech bubble bursting wouldn’t be a sole driver, they say. They also compared returns for tech in the past year to those in the 12 months before the peak of the dot-com bubble. In 1999/2000, those returns were driven by earnings growth but also far steeper rises in valuation that what investors are seeing currently, notes Goldman: The biggest risk for tech right now, says the Goldman team, is competition, noting how the AI space has thus far been dominated by a few incumbents. Bubbles of the past formed during periods of huge competition, with investors and new entrants crowding in. “A plethora of new companies will be formed in emerging industries we cannot even imagine today. None of the 10 largest companies in the S&P 500 in 1985 were still in the top 10 in 2020, and only one from the list in 2000 remained in the top 10 in 2020,” they said. For that reason they say diversification remains crucial and highlight some strategies they say have already started to work. For example, global stock indexes have performed strongly this year and many aren’t even exposed to U.S. tech. Big tech’s physical infrastructure needs are becoming clear, and that could boost returns for capital goods, energy, resources, real estate and transport. Finally, the current boom in capex spending is likely to create new tech superstars, so investors should watch for returns in the space to broaden out. Read: Three scenarios that could spook stocks in October, according to a Wall Street veteran The markets U.S. stocks DJIA SPX COMP are higher as trading gets under way, led by tech, with Treasury yields BX:TMUBMUSD10Y BX:TMUBMUSD02Y slipping. Gold GC00 is trading at $4,063/oz and onto another record, while silver SI00 is also nearing a big level. The dollar DXY is up 0.2%. | Key asset performance | Last | 5d | 1m | YTD | 1y | | S&P 500 | 6714.59 | 0.39% | 3.10% | 14.16% | 16.75% | | Nasdaq Composite | 22,788.36 | 0.57% | 4.15% | 18.01% | 25.33% | | 10-year Treasury | 4.126 | 2.40 | 7.30 | -45.00 | 5.70 | | Gold | 4054.4 | 4.16% | 10.16% | 53.62% | 54.39% | | Oil | 62.28 | 0.78% | -2.31% | -13.34% | -15.10% | Data: MarketWatch. Treasury yields change expressed in basis points | Need to Know starts early and is updated until the opening bell, but sign up here to get it delivered once to your email box. The emailed version will be sent out at about 7:30 a.m. Eastern. The buzz Nvidia NVDA CEO Jensen Huang told CNBC that computing demand “has gone up substantially” in the last six months, and shares are up. Elsewhere Elon Musk’s xAI is reportedly looking to raise $20 billion — with Nvidia among the investors. Confluent shares CFLT are up 20% on a report that the data streaming software group is looking to sell itself. SoftBank JP:9984 is buying ABB’s industrial robots unit for $5.4 billion in a bet on artificial super intelligence. Jefferies Financial Group JEF said it has around $715 million worth of exposure linked to bankrupt auto parts company First Brands, and its shares are slipping. Minutes of the Fed’s September meeting are due at 2 p.m., while St. Louis President Alberto Musalem, Gov. Michael Barr and Minneapolis Fed President Neel Kashkari are set to speak during market hours. Best of the web U.S. airlines are now facing the shutdown blues. Why insurers are taking your money to the Cayman Islands. Ted Cruz wants to make it easier to sue the government for censorship. The chart Investors are excited as gold continues to bust above $4,000, but observe this chart from Albert Edwards, Societe Generale’s global strategist. It shows gold’s equivalent in yen is now above $5,500. Edwards said the likelihood that the gold price is responding to further currency debasement is evidenced by the fact that the whole precious metals complex was appreciating rapidly in price. Top tickers These were the top-searched tickers on MarketWatch as of 6 a.m.: | Ticker | Security name | | TSLA | Tesla | | NVDA | Nvidia | | AMD | Advanced Micro Devices | | GME | GameStop | | TSM | Taiwan Semiconductor Manufacturing | | PLTR | Palantir Technologies | | PLUG | Plug Power | | YYAI | Connexa Sports Technologies | | RKLB | Rocket Lab | | NIO | NIO | Random reads Drivers might have been stewed by 46,000 pounds of applesauce on a road. The latest body-care craze is dessert-smelling soap. A cautionary tale over swallowing live frogs. Goldman Sachs strategists, led by Peter Oppenheimer, contend that the current equity rally, particularly in leading technology companies, does not constitute a bubble. They argue that high valuations are supported by "fundamental growth" and "staggering profit growth" from companies with strong balance sheets, rather than irrational speculation. This perspective differentiates the current market from historical bubbles, where extreme valuations often lacked underlying fundamental justification. Goldman views elevated market valuations as a broader phenomenon driven by low interest rates, high global savings, and an extended economic cycle affecting all risk assets, not solely tech. The primary risk to the AI tech boom is identified as increasing competition, not current valuation levels. They highlight that the AI space is currently dominated by a few incumbents but anticipate new entrants and a broader distribution of returns. U.S. stock indexes (S&P 500 up 14.16% YTD, Nasdaq Composite up 18.01% YTD) are showing strength, led by technology, while Treasury yields are slipping. Gold has reached a record $4,063/oz, indicating broader risk-on sentiment or currency debasement concerns. Individual companies like Nvidia, with its CEO noting substantially increased computing demand, and Confluent, seeing a 20% share jump on M&A reports, are exhibiting strong positive momentum.
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