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One corner of technology, software, could see a “limited appetite” from the market, according to Goldman Sachs. But the investment bank is optimistic. He listed several reasons for his bullish call: “a more constructive setup due to near-record valuations…cautious management guidance that better aligns with investor expectations, and a shift towards cost optimization and margin expansion “. Goldman analysts predicted in a Jan. 23 note that earnings-per-share (EPS) growth in software stocks could outpace the broader S&P 500 index this year. The S&P 500 was down nearly 20% for 2022, but has since pared some losses, rising about 6% year-to-date. The index’s EPS was $217.39 in December 2022, but could reach $225.42 by the end of this year, according to estimates from FactSet. Goldman said he believes software free cash flow margins can grow, in part due to leaner organizations and greater sales capacity. The bank sees some stocks as attractive buys despite downside risks. He named Microsoft, ServiceNow and Workday, describing these stocks as “well positioned to provide investors with near-term opportunities despite the changing macro landscape.” “This group ranks well on a number of high-value characteristics such as mission criticality, strong retention metrics, fast time to value, operational efficiency and/or investor-friendly capital allocation. “, wrote Goldman. Goldman expects Microsoft and ServiceNow to be part of a larger trend in 2023: He expects companies to cut costs in 2023, reversing their focus on growth. This, he said, bodes well for operating margins and profits. Goldman also named a “set of offensive picks that we believe will outperform their peers as the broader environment shifts toward recovery.” A trader who takes an “offensive” approach opts for outperforming, but riskier stocks. Bank picks include Datadog, Snowflake, and Salesforce. This gave Datadog a “buy” rating and a price target of $128, up almost 70%. “We view these stocks as having a strong long-term growth track and could become more supportive once we see signs of an economic recovery beginning to take hold,” the bank’s analysts added. Software stocks were an investor favorite during the pandemic, but their popularity waned as economies reopened. Nevertheless, the technology sub-sector remains a key component of several long-term secular trends, such as cloud computing and artificial intelligence. Several Wall Street banks have recently expressed bullishness on the long-term sector, though they still warned investors to be selective, especially this year. – CNBC’s Michael Bloom and Zavier Ong contributed to this report.
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