Goldman Sachs says bet on tech stocks to beat the market the next 12 months

Key Points
  • Better relative earnings and a lower dependency on the macroeconomic backdrop will keep tech outperforming the next 12 months, Goldman says.
  • The Nasdaq 100 —which tracks the 100 largest companies in the Nasdaq composite — closed at an all-time high of 5,646.09 on Friday.
A worker at an Amazon shipping center in Schertz, Texas.
Robert Daemmrich Photography | Corbis | Getty Images

Tech stocks have been on a tear lately and will continue to outperform the broader market for two key reasons, according to Goldman Sachs.

The first reason analysts at Goldman cited is sales and earnings growth. "Current relative valuation may restrain upside, but superior sales and EPS growth prospects coupled with a larger weight in technology suggests NDX [Nasdaq 100] total return of +2 percent vs. -1 percent for S&P 500 in the next 12 months," Goldman's chief U.S. equity strategist, David Kostin, said in a Friday note.

The tech sector posted a stellar earnings season through Friday morning, according to data from The Earnings Scout. Eighty-four percent of tech companies topped Wall Street's profit estimates while 68 percent exceeded sales estimates, the data showed. By comparison, 75 percent of S&P 500 components beat profit expectations.

The tech-heavy Nasdaq 100 — which tracks the 100 largest companies in the Nasdaq composite — closed at an all-time high of 5,646.09 on Friday. The index is also up 16.09 percent for the year, while the S&P has gained 7.17 percent in that period.

The second reason cited by Goldman is that tech is less dependent on what happens with the economy the rest of the year.

"The performance of NDX vs. is dependent on economic growth, but exhibits low sensitivity to other macro variables," they wrote. "NDX vs. S&P 500 returns show low correlation with changes in inflation, interest rates, USD and oil."

"However, NDX is heavily concentrated in growth equities and NDX vs. S&P 500 relative returns are positively correlated with our growth factor."

The five largest stocks in the tech-heavy Nasdaq 100 — Apple, Alphabet, Microsoft, Amazon and Facebook —are all outperforming the S&P 500 this year, rising at least 10 percent in that period.

"Our GS research have strong fundamental forecasts for the five largest stocks in NDX," the note states.

S&P 500 (red) vs. 5 largest Nasdaq 100 stocks

Source: FactSet