Strong upcoming earnings results could reverse the decline in mega-cap technology and growth stocks, which have been hammered by the rise in Treasury yields and are trading at their cheapest levels in six years by one measure, according to Goldman Sachs strategists.
The so-called Magnificent Seven group of megacap stocks -Apple, Microsoft, Amazon, Alphabet, Nvidia, Tesla, and Meta Platforms - have fallen 7 per cent over the last two months, compared with a 3 per cent decline in the broad S&P 500, as Treasury yields jumped more than 60 basis points to 16-year highs.
Those declines have pushed megacap forward price-to-earnings ratios down by a collective 20 per cent over the last two months, leaving them trading at their largest discount to the market based on long-term growth since January 2017, Goldman Sachs said in a note dated Oct. 1. At the same time, the group is expected to post sales growth of 11 per cent in the third quarter, compared with a 1 per cent improvement for the S&P 500, the firm noted.
The megacaps in aggregate have beaten consensus sales growth expectations 81 per cent of the time and have outperformed in two-thirds of earnings seasons since the fourth quarter of 2016, Goldman’s strategists said.
“The divergence between falling valuations and improving fundamentals represents an opportunity for investors,” they wrote.
The bullish call on tech stocks comes as investor sentiment for equities overall has flatlined, which historically has been a contrarian indicator of more gains ahead, Savita Subramanian, equity and quant strategist at BofA Global Research, wrote in a note Monday.
The average recommended allocation to equities in balanced funds remained unchanged at 53 per cent in September, below the benchmark of 60 per cent, Subramanian noted. Falling sentiment has historically been a signal of broad gains over the following 12 months, she noted.
The S&P 500 has dropped nearly 5 per cent over the last 10 trading days but remains slightly more than 11 per cent up since the start of the year.
“We expect the S&P 500 to rally into year-end, with more upside in the equal-weighted index,” Ms. Subramanian wrote.
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