The rise of technology sector stocks this year is well-supported, according to analysts at Goldman Sachs Asset Management (AM). „Big Tech is performing very strongly overall, with major tech companies generating a lot of cash and showing robust growth“, says Luke Barrs, Global Head of Fundamental Client Portfolio Management at Goldman Sachs AM, in an interview with Börsen-Zeitung. „The situation is therefore completely different from the dot-com bubble at the turn of the millennium, when some stocks were unprofitable or had triple-digit multiples.“

As a result, Barrs does not advise investors to completely exit the tech sector now. „The prices of Big Tech stocks may take a breather after the sharp rise, and we might see some consolidation, but long-term, the upward trend in tech is likely to continue“, he explains. „But what we are seeing is differentiation among individual stocks in the tech space. Different companies are facing different challenges. The current task is to identify the really good stories.“

Nonetheless, Barrs believes investors should also consider the valuations of different market segments. „There is currently a significant valuation gap between small-cap stocks and the overall US market, including tech“, he notes. „This gap has now reached historic proportions.“

Against this backdrop, Goldman Sachs AM advises investors not to invest solely in tech stocks. It recommends that investors broaden their exposure in the US stock market and include small caps.

This year, it has primarily been technology stocks that have risen, while the broader market has lagged behind. This might now change, with monetary policy playing a key role. „A catalyst for the normalisation of these valuation differences could be the expected interest rate cuts from the Fed“, states Barrs. „Historically, small caps have always benefited significantly from Fed rate cuts.“

The US presidential election is shaping up to be a tight race. „The US election could lead to higher volatility“, says Barrs. „A broad portfolio diversification can help mitigate that.“

Instead of just focusing on a specific politician at this point, it is better to consider which stocks might benefit under a new US president, regardless of who ultimately wins the election. There is, for example, a trend of repatriating manufacturing to the US, which both candidates support. Companies benefiting from this will become more attractive. Many US small caps stand to gain from this trend as well.

It is not only US small caps that offer attractive valuations. In China, a market bottom seems to be forming, after valuations dropped significantly. „We are seeing new opportunities in the Chinese stock market“, says Barrs. „We now consider certain Chinese stocks attractive again.“

Overall, emerging markets are once again appealing from an equities standpoint. „We particularly like India“, states the Goldman-AM expert. „India’s economy is expected to grow strongly in the coming years with a young and expanding population.“ Although Indian stocks may not appear cheap in terms of multiples, the growth potential of India’s economy and its rapidly growing population should be factored in.

German stocks are relatively undervalued. However, Barrs questions whether there is a catalyst for a revaluation. Apart from a slowdown in domestic investment, part of Germany’s economic weakness stems from its high correlation with the Chinese economy.

The automotive, chemical, and industrial sectors are the primary victims of China’s weakness and Germany’s slow growth. According to Barrs, this situation should improve once we see some recovery in China, though so far the improvement trend has been unconvincing. Another potential solution to boost GDP could be fiscal easing, as Germany’s low budget deficit still provides a cushion.

For now, the German and European stock markets are not among the top picks for Goldman Sachs AM. „In a global portfolio, we currently overweight small caps, US stocks, Japan, and emerging markets, particularly India“, says Barrs. „The European and German stock markets look attractive in terms of valuations. But we would need to see catalysts for a revaluation in order to overweight these markets.“