Mega-cap Tech Stocks Could Underperform S&P 500 in 2023 - Goldman

Portfolio managers are growing increasingly concerned that mega-cap tech firms can continue to maintain their premium sales growth rates relative to the rest of the market, Goldman Sachs’ top U.S. equity strategist David Kostin said.

“Mega-cap tech firms generated remarkably high average annual sales growth of 18% during the past decade. In contrast, the broad market delivered annualized growth of just 5%. However, the dynamic has reversed in 2022: Aggregate sales growth for mega-cap tech is forecast to rise by 8% this year, well below the 13% growth expected for the overall index,” Kostin wrote in a client note.

This could be the key reason why all four mega-cap tech stocks - Apple (NASDAQ: AAPL), Alphabet (NASDAQ: GOOGL), Microsoft (NASDAQ: MSFT), and Amazon (NASDAQ: AMZN) - have underperformed the S&P 500 this year, a trend that could continue into 2023.

This quarter is on track to become the 11th quarter in the past ten years in which the four mega-cap tech stocks have collectively underperformed the S&P 500. Meta Platforms (NASDAQ: META) saw its shares plunge significantly in light of yet another disappointing earnings report. As a result, the company no longer ranks among the 20 largest S&P 500 constituents.

One of the reasons explaining the slower-than-expected growth for tech mega caps could be the slowed M&A activity amid tighter antitrust scrutiny. The 4 aforementioned companies announced just 22 M&A deals this year, which is less than half the number five years ago, Goldman’s analysis showed.

Moreover, the valuation of mega-cap tech stocks is “collectively expensive relative to bonds,” added Kostin. Apple trades at a historical EV/sales premium vs. the market while Microsoft trades at an above-average historical valuation vs. S&P 500. Google and Amazon have their valuations at the lower tail of their valuations during the past decade.

By Senad Karaahmetovic

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