LIVE MARKETS-Recent rally in S&P 500 not yet as high as 2000 tech bubble, post-pandemic highs
The recent rally in the S&P 500 has not reached the levels of the 2000 tech bubble or post-pandemic highs. Market-implied long-term growth expectations for S&P 500 stocks have also not matched previous levels. Valuations of top technology stocks are elevated but still lower than during the tech bubble and post-pandemic highs. Goldman Sachs identifies four phases of the current AI trade, with different companies benefiting at each stage. Investors are expected to trade Phase 2 and Phase 3 faster than Phase 4.
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RECENT RALLY IN S&P 500 NOT YET AS HIGH AS 2000 TECH BUBBLE, POST-PANDEMIC HIGHS
The recent rally in the S&P 500 (.SPX) , which has been powered mostly by optimism around artificial intelligence (AI) and technology stocks, particularly Nvidia (NVDA.O) , may seem overdone to some investors.
But that ascent still remains well below levels reached during the 2000 tech bubble and even post-pandemic highs, Goldman Sachs analysts wrote in a note late on Friday.
Current estimates of “market-implied” long-term growth expectations for S&P 500 stocks have risen to only 11%, compared with the 16% reached during the 2000 tech bubble and the 13% hit during the pandemic in late 2021, the analysts said.
Furthermore, the valuations of the top ten largest technology/related stocks today - including Microsoft (MSFT.O) , Apple (AAPL.O) , Nvidia (NVDA.O) , Amazon.com (AMZN.O) , and Alphabet (GOOGL.O) - may be elevated, with a median forward price-earnings ratio currently at 28.
Yet, that still pales in comparison to levels reached by a similar crop of stocks in the 2000 tech bubble, when the forward P/E ratio hit 52, and during the post-pandemic highs in 2021, when the ratio was at 43.
Goldman Sachs now sees four phases of the current AI trade that embodies investor behavior towards relevant stocks, with euphoria around Nvidia and the subsequent rally in its shares representing the first phase.
The second phase will focus on those companies, including Arm (ARM.O) , AMD (AMD.O) , Qualcomm (QCOM.O) and Broadcom (AVGO.O) , which are involved in the infrastructure necessary to build AI.
The third phase will focus on AI “enabled” companies, including Meta Platforms (META.O) , Apple (AAPL.O) , Intuit (INTU.O) , and Adobe (ADBE.O) , which have business models that can incorporate AI in their product offerings to boost revenues.
The fourth phase will focus on companies across sectors such as communication services, energy, financials, healthcare, and consumer discretionary and consumer staples, which can harness AI technology to improve their productivity. These companies can include Pinterest (PINS.N) , Walmart (WMT.N) , Occidental Petroleum (OXY.N) , and Marsh & McLennan Companies (MMC.N) .
“We expect investors will trade Phase 2 and Phase 3 faster than Phase 4, as many companies in these two phases are necessary for every other company to use the technology to improve productivity,” the analysts wrote.
(Chibuike Oguh)
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