Goldman Sachs on bubble speculation: “We don’t think we are in one yet”
But they still think investors should focus on diversifying.
The great debate continues over whether we’re watching a major asset bubble inflate, with Goldman Sachs analysts weighing in with a beefy analysis focusing heavily on the valuation of giant tech stocks like Nvidia, Microsoft, Amazon, and Tesla this morning.
Here’s their upshot:
“There is still a risk that we end in a bubble but, on balance, we don’t think we are in one yet.
Also, if investors started to lose faith or patience in the AI theme, there is a smaller risk of an economy-wide effect that in many previous bubble episodes because private sector balance sheets remain relatively healthy. There is less leverage or debt that is financing the current spending boom and, importantly, banks’ balance sheets are strong.
None of this would prevent a market correction in the event of a de-rating of technology and AI growth prospects, however. Given these risks, we continue to focus on diversification strategies.”
Goldman has some very smart analysts. But as with all sell-side research, it should be read with a few grains of salt.
Sell-side analysts who predict bubbles don’t tend to remain sell-side analysts for long. That’s because their “side” is “selling” securities, which people don’t buy if they’re worried a bubble could pop and crush the market.
Still, Goldman did a lot of work on valuations in its analysis, finding that “it is underlying profitability and return on equity that has largely explained the rise in valuations.”
In other words, the high valuation of the US market — and the S&P 500’s price-to-earnings multiple is a remarkable 23x forward earnings — is largely justified by the fact that the US tech sector generates such massive profits.
