Goldman Sachs’s top stock-market strategist, David Kostin, highlights several key differences between the tech-stock rally of 2022 and that of 2021. While similarities exist, the nuances set this year apart.
Evolution of Valuation Ratios
Companies with an enterprise value-to-sales ratio of at least 10 now represent 24% of the total U.S. stock market cap, a decrease from 28% in 2021 and 35% during the late 90s tech bubble. The decline in the number of stocks with elevated valuation ratios indicates a shift from broad-based ‘growth at any cost’ investing seen in 2021.
Focus on Largest Growth Stocks
Investors are now primarily paying high valuations for the largest growth stocks in the index. This trend closely resembles the Tech Bubble rather than the dynamics of 2021. However, Kostin emphasizes that the valuation of the ‘Magnificent 7’—including Microsoft, Apple, Nvidia, Alphabet, Amazon.com, Meta Platforms, and Tesla—is currently supported by their fundamentals.
Impact of Capital Costs
The implied weighted average cost of capital of the S&P 500 dropped to 3.8% in 2021 but has risen to 5.7% this year. This change has directed investor attention towards profitability. The higher cost of capital has also led to small-cap underperformance, distinguishing this period from the 2021 market environment.
Future Expectations
Kostin anticipates that the cost of capital will remain elevated compared to the past decade. Consequently, valuations of small and unprofitable growth stocks are unlikely to revert to the levels observed in 2021.
In conclusion, while echoes of past tech-stock rallies persist, the distinct characteristics of the current market landscape underscore the unique features of the tech-stock rally in 2022.
