Goldman’s David Kostin says a tech disconnect is the ‘single greatest mispricing’ in U.S. stocks

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  • According to David Kostin, chief US equity strategist at Goldman Sachs, the potential for a tech stock derivative to be even higher.
  • US Tech sold off sharply in the first week of the year, moving into correction territory on Monday before rallying the Nasdaq 100 to pull off a four-day losing streak.
  • Analysts broadly expect 2022 to be a rough year for high-growth tech names that have benefited from ultra-lax monetary policy necessitated by the Covid-19 pandemic as that stimulus is removed.

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The US tech sector tops a substantial disconnect for investors in 2022, according to David Kostin, Chief US Equity Strategist at Goldman Sachs.

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US Tech sold off sharply in the first week of the year, moving into correction territory on Monday before rallying the Nasdaq 100 to pull off a four-day losing streak.

With the Federal Reserve taking a more aggressive tone over the past month, the prospect of a higher interest rate environment has prompted massive investor hesitation. Markets are now preparing for possible interest rate hikes along with tightening of central bank balance sheets.

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As a result, analysts broadly expect 2022 to be a difficult year for high-growth tech names that have benefited from the ultra-lax monetary policy necessitated by the Covid-19 pandemic as that stimulus is removed.

“The single biggest misprice in the U.S. equity market is between companies that have high revenue growth expectations but low or negative margins, and high growth companies with positive or very significant positive margins on the other hand. That gap has changed over the past year. has adjusted dramatically,” Kostin told Businesshala Monday ahead of the Wall Street giant’s global strategy conference.

Kostin highlighted that high-growth, low profit-margin stocks were trading at 16 times enterprise price-to-sales in February 2021. The enterprise price-to-sales ratio helps investors to evaluate a company’s sales, equity, and debt by taking it into account. ,

These shares are now trading at about seven times the enterprise price-to-sales, Kostin said.

Kostin said, “A lot of this happened in the past month, and that’s largely because as rates rise, valuations, or the value of future cash flows, are somewhat lower in a higher rate environment.” “

“It’s a big issue, and so the difference between those two, I would say, is the biggest topic of conversation with customers. You’ve got a huge derivative of the rapidly expected revenue growth companies that have lower margins, and The rationale is probably that there is still more to go in that readjustment.”

He argued that the gap between these two types of stocks is quite close, and will likely widen. Kostin said this could take the form of companies with rapid growth and valuations driving high profit margins, or those with low or negative margins pulling back.

“It largely comes down to the relationship between rates and equities, an important topic for fund managers regarding the pace and magnitude of change, and especially the consideration of profit margins, and this rate change is very important in the environment. We’re experiencing right now,” Kostin said.

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