Goldman Says Tech Bull Market Has Room to Run

Joining us now is Matt where Goldman Sachs wealth Management co-head of the investment strategy group. And actually, you know, coming into this morning, my question for you is whether we've hit a market top or not. And there are lots of like, you know, in the technology sector in particular indicators that you could argue either way. Where do you guys sit right now? Yeah. Thank you very much for having me out. I think a key focus over the last few weeks has been a very small number of large tech stocks have been driving this market. That's right. Prior to a new all time high. That is not necessarily the ideal setup, but we are of the view that that alone by no means suggests that this is a market peak or that we've seen the all time high this cycle. I think a couple of things we should be pointing out. The first is it's been a very short period when you've seen this divergence between, for example, The Magnificent Seven and the rest of the 493 stocks in the S&P 500. We've also seen divergences like this in 2023 2024 that did it derail this bull market we've been on. And then I think the most interesting thing is if you zoom out and take a longer term view. So year to date the S&P 500 is up. The Magnificent Seven is up by about the same magnitude 15% as the S&P 493 stocks outside. So the two are actually performing quite comparably. Yeah. And you would say, well go back three years. Go back to 2023. I mean you say year today. I mean it's October already. Correct. Um, but uh, that's an interesting distinction. A lot of people pose a question to me, like, are we in a cycle? Like for example, in memory, is there actually a cycle? Where were we in it? Yep. But more broadly for the technology sector, a cycle where the conversation is distorted by sort of line goes up. Yeah. In high investment terms. Yeah. So we think in the third quarter we did see the peak growth rate in hyperscale or CapEx, which is driving that's the key number. Exactly. Now that sounds like bad news. The rate of growth there at 116% in year over year terms is unsustainably high. We think that that rate of growth is going to come down such that at the end of next year, fourth quarter 2027, the growth rate we think will be 22%. If you view that in the context of nominal GDP growth in the US of 4 to 5%, even at that growth rate in the fourth quarter next year, we're still seeing CapEx growth 4 to 5 times higher than nominal GDP growth. So nothing to sneeze at. It's just a deceleration of a very fast growth rate. You know, higher rates discount the present value of future cash flows that, you know, go by the book when it comes to the tech sector. But like, you know, valuations have been pretty steady. Um, you know, now we confront earnings season at the same time as a midterms election. You know which which sort of headwind if we get that headwind wins out. Yeah. The investor community is so interesting. When you see macroeconomic uh, excuse me, events like a midterm election at the same time as an earnings season. In some quarterly earnings season, you see the market distracted by what's happening at the macro level. Yes. And not necessarily focused on what's happening at the earnings level, which we think is a mistake. Earnings ultimately determine the path of the market. This could be a quarter like that. But what we do though see at is even if there's an economic event or macro event that distracts investors from looking at earnings. Ultimately, when the dust settles, investors will come back to earnings. We think while earnings season is starting soon here for the third quarter, given, as you mentioned, we're already in October, investors are increasingly focused on 2027. And we do think that the earnings growth outlook still looks good for next year. This um that's put the markets in a way to one side even I yeah talk about human beings clients. You know you guys represent a lot of net wealth right. Um what are their behaviors like how are people having conviction or a lack of conviction about their portfolios right now. Yeah. So especially here in the Bay area, a lot of our clients are making wealth in the tech sector in I soon to be newly minted millionaires and more from IPO's that may or may not happen precisely. And so there is a lot of planning that's taking place. We're getting a lot of incoming phone calls from folks who stand to see a very large wealth creation event. If we do see these people, are you having to become a real estate guy, by the way, though? You know what I mean? Yeah. The real and by the way, that is a very frequent question that's coming up when we actually had this conversation yesterday, which is the first things people ask about when an event like this happens is how much home can I afford right now? That is something we help our clients with, but our main focus is on the investment portfolio. And what do they do with these concentrated stakes in either a private company or a public company? That's where a lot of these conversations are in. The right answer for each family or client does differ. Some clients have a very high risk appetite. They very much believe in the company where they have a concentrated stock, they're going to hold on to that position. Others, they'll say, oh my gosh, I've now ended up with much more money than I ever thought I would. And they start to diversify. You would appreciate, like many of these people watch this show, right? What we're talking about here is anthropic IPO and how much liquidity event over time that is for certain individuals. Yes. What was the lesson from the space IPO? Yeah. You know, I think there are a few lessons. One is the SpaceX IPO was well telegraphed. I think a lot of people knew that it was coming. And so there was a lot of preparation ahead of time. Space as a company has been around a lot longer than some of these anthropic, OpenAI and other AI companies. So this is happening over a very compressed timeline for employees and engineers and founders and executives at these companies. So unfortunately, there's a lot of really quick planning that has to take place such that when these IPO's occur, they know what they're going to do, they have a plan. And that's something that we're frequently helping with clients with.