Goldman Sachs flags potential tech earnings bubble

Goldman Sachs has warned that technology stocks may be facing an "earnings bubble" as heavy capital spending raises doubts about the sustainability of their profit growth. The investment bank said investors have already priced in concerns, and value is emerging in the sector.

The warning follows a surge in capital expenditure by large tech firms after the launch of ChatGPT. The spending has eroded premium cash flows and pushed companies towards debt and equity markets. The five largest US stocks now have a price-to-earnings ratio only slightly above the other 495 in the S&P 500, snapping a long streak of premium valuations.

Goldman Sachs distinguishes the current cycle from the dot-com era, when valuations were far higher and later collapsed. This time, stock prices have adjusted more modestly while earnings remain strong. Within tech, leadership has shifted from software to hardware, with memory and chip companies benefiting from demand for computing power, but cyclical concerns have led to a de-rating.