Goldman Sachs portfolio strategists are telling clients that following the recent correction in mega-caps due to the sharp recent increase in Treasury yields it is time to start buying again ahead of upcoming third-quarter earnings results.
Stocks in focus are mega-caps Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOGL), NVIDIA (NASDAQ:NVDA), Tesla (NASDAQ:TSLA), and Meta Platforms (NASDAQ:META).
The strategists highlight that the group collectively accounts for 27% of the S&P 500 index. While sales and earnings expectations for the biggest tech stocks have seen upward revisions since August began, this group has lagged behind the other 493 S&P 500 companies by 4 percentage points during this period, with a performance of -7% compared to -3%.
Meanwhile, Goldman Sachs economists and rates strategists anticipate that yields will decrease to 4.3% in the fourth quarter but will reach a peak of 4.6% in the first half of 2024, eventually settling back to 4.3% by the end of that year. If yields remain contained in 2024 at these levels, it would imply that most of the de-rating has already occurred.
"The divergence between falling valuations and improving fundamentals represents an opportunity for investors: On a growth-adjusted basis, the mega caps trade at the largest discount to the median S&P 500 stock in over six years," the strategists commented.
Further, historical patterns indicate that the upcoming third-quarter results could potentially trigger a shift in momentum for the largest tech stocks. Since the fourth quarter of 2016, these mega-cap stocks have exceeded consensus sales growth expectations in 81% of instances and have outperformed during about two-thirds of earnings seasons, typically by a margin of 3 percentage points.