Goldman Sachs CEO David Solomon says that while investors are chasing tech and semiconductor names, he’s keeping a close watch on the 490 stocks that will likely benefit from technological advancements.
The News
In a new Bloomberg interview, Solomon says the top 10 companies in the S&P 500 are trading at 30x forward earnings, but their valuations can be justified by earnings growth.
He also pointed to the dot-com bubble when valuations of the top 10 companies were above 40x forward earnings.
“The earnings multiple on the top 10 companies in the S&P 500, these are approximate numbers… the top 10 companies are trading on forward earnings in the low 30s. In the 1990s, the late 1990s, 2000s, the internet boom, those companies were trading at the high 40s to 50s. You think about Cisco, and its market cap was over $600 billion.
So, these multiples are high, but the growth is pretty good. The earnings are real. Those numbers are on the high end of the distribution for sure, but not crazy.”
Solomon says he is interested in the other 490 stocks in the index, noting that they are trading at much cheaper multiples with the prospect of harnessing AI-driven productivity gains.
“The other 490 [stocks] are trading between 17x and 20x, which by the way, 20x is on the high side. When you add it all together, it’s 22x forward [earnings]. A lot of it is at 17x.
I actually think that 17x is pretty attractive if you think that all these companies are going to be able to use technology. Not all of them will execute successfully. But to be able to improve operating processes and create more efficiency, and therefore faster earnings growth and more investment in their business. You should see over the next five years an improvement in the earnings growth of the other 490.”
What It Means for Investors
Solomon appears to be saying that investors, particularly the retail crowd, are piling into semiconductor names for short-term gains while missing the bigger picture. The Goldman Sachs executive also echoes the stance of Fundstrat head of strategy Mark Newton, who said that the semiconductor trade is crowded and other stocks in the index deserve another look.
Earlier this week, Newton said investors should keep an eye on consumer discretionary and airline stocks, noting that both sectors are starting to flash signs of strength. One stock that is currently trading at all-time highs while its valuation is well below the 10-year average is Delta Air Lines (DAL).
Data shows DAL’s price-to-earnings (P/E) multiple is currently 11.54x, 42% below its historical average of 19.81x. Meanwhile, DAL is trading at $79, close to its all-time high of $83, which it hit just last week.
From a technical perspective, DAL is facing no real resistance as it is trading in “blue skies” territory, suggesting that there are no price levels that could limit its ascent for now. Currently, the stock appears to be consolidating with strong monthly support at $70.
Delta is using AI in many areas of its business, but the company hasn’t perfected its execution. Last year, it received backlash after lawmakers sent a letter asking whether the company is using AI to hike ticket prices.
Solomon says not all companies will get AI right, but many will be able to use AI to accelerate earnings growth over the next five years. If he is correct, the next phase of the equity bull market will shift from narrow market leadership into a broader rotation.
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