Goldman Sachs analysts said in their Weekly US Kickstart note Monday that the current growth stock rally is unlike the tech bubble seen in the 1990s.
The investment bank explained that the share of market cap concentrated in stocks with very high valuations has recently surged to levels similar to those reached during the euphoria of 2021.
"Stocks with EV/sales ratios greater than 10x now account for 24% of US equity market cap, versus 28% during 2021 and 35% during the late '90s Tech Bubble," they wrote.
According to the firm, the prevalence of extreme valuations today looks far less widespread than in 2021 after adjusting for market concentration, with the cost of capital (WACC) much higher today and investors focused on margins rather than "growth at any cost."
"A higher WACC means valuations of small and unprofitable growth stocks are unlikely to return to their 2021 highs," added Goldman. "Unlike the broad-based 'growth at any cost' in 2021, investors are mostly paying high valuations for the largest growth stocks in the index.
"This dynamic more closely resembles the Tech Bubble than 2021. However, in contrast with the late '90s, we believe the valuation of the Magnificent 7 is currently supported by their fundamentals."