Goldman Sachs indicates that now is an opportune moment to buy the weakened US technology sector on market dips. This year, concerns over the disruptive impact of artificial intelligence and the Iran conflict have significantly pressured this segment. The bank outlines seven reasons why current valuations are attractive for investors. The US tech sector faced a challenging start to 2026, as investors grew wary that AI could fundamentally disrupt business models across industries, while worries persisted about soaring capital expenditures among hyperscale data center operators. The SPDR Technology Select Sector ETF (XLK.US) has declined 5.7% this year and is down 10.4% from its peak on October 29 last year. However, in a client note authored by global equity strategist Peter Oppenheimer on Tuesday, Goldman Sachs suggested it might be an ideal time to start accumulating positions in the sector, labeling it a "value opportunity" and presenting seven key reasons. Firstly, from a half-century perspective, the tech sector is experiencing one of its worst annual starts since at least 1976, having retreated from elevated valuation levels. Secondly, the forward PEG ratio for the global technology industry is now substantially below that of the overall global market. The PEG ratio, which measures the price-to-earnings ratio relative to earnings growth rate expectations for the subsequent twelve months, has fallen below 1 for the tech sector, indicating undervaluation. Thirdly, the rolling PEG ratio for tech stocks is also in undervalued territory. This metric, which compares earnings over the past twelve months with the earnings growth rate over the past three years, removes uncertain components. The bank stated, "The crash in the 'look-back' PEG for tech stocks implies a significant future earnings decline and has fallen to levels seen at the trough following the 2003-05 tech bubble burst." Fourthly, the forward twelve-month price-to-earnings ratio for global technology and software stocks relative to the rest of the world is at its lowest level since at least 2019. Fifthly, measured by the same valuation standard, global tech stocks are currently trading nearly in line with their 20-year median. Only the financial sector trades close to its historical level, while all other sectors boast valuations above their historical averages. Sixthly, although US Technology, Media, and Telecom (TMT) stocks have high price-to-book (PB) ratios, they also exhibit high returns on equity (ROE), suggesting they are at historically reasonable and trend-consistent levels. Return on equity refers to the ratio of company profits to its market value. Goldman Sachs suggests this should alleviate concerns about excessive spending on AI infrastructure. In contrast, during the peak of the dot-com bubble, ROE did not align with PB ratios. Finally, despite recent sell-offs, the net percentage of positive analyst earnings estimate revisions for 2026 and 2027 for tech stocks continues to exceed that of all other sectors. Goldman Sachs is not alone in identifying a buying opportunity in the US tech sector. Wells Fargo also believes valuations for information technology stocks have reached attractive levels. The Wells Fargo Investment Institute has upgraded its rating for the sector from "neutral" to "favorable," citing its underperformance relative to the S&P 500 and the supportive long-term prospects backed by the widespread adoption of AI. The firm's global investment strategy team noted that despite concerns over valuations, capital expenditures, and AI disruption, the fundamentals of the information technology industry remain strong, citing double-digit earnings growth in the fourth quarter as an example. Strategists also highlighted that since the outbreak of the US-Iran conflict, the information technology sector has outperformed the S&P 500, underscoring its long-term growth and quality characteristics. Bill Baruch, head of investment business at asset management giant Blue Line Capital, previously pointed out significant opportunities in the US software industry following recent market turbulence. He views software giants like ServiceNow (NOW.US), Oracle (ORCL.US), and Microsoft (MSFT.US)—which have been heavily sold off since February amid pessimistic "AI disruption" narratives—as attractive investments at current price levels. In an interview, Baruch also expressed a bullish outlook for the broader US stock market, specifically mentioning tech stocks that he believes have been unfairly punished in the recent sell-off. Furthermore, veteran strategist Ed Yardeni's latest commentary this week echoes these sentiments. He believes that after retreating from last year's historic highs, US tech stocks have returned to levels attractive for investors willing to commit for the long term.
Comments