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The fear of rising interest rates have absolutely demolished premium priced growth stocks in favor of value stocks such as banks/industrials, energy, low PE stocks. The reasons are two fold.
1. Rising interest rate is a sign of a healthy economy. Companies that are mature(which means own majority of the market share) will continue to do well in a good economy. Any signs of bad economy means the bottom line will suffer as they were at near max market share during a good economy.
2. High growth stocks are not valued at today's cash flow, but at a future cash flow discounted to today divided by an interest rate. The higher the interest rate, the lower the projected cash flow. This is a calculation done for high growth stock valuation and no matter how bullish you are about a company, you still cannot escape the fate of this calculation.
So after the June Fed meeting, the hawkish stance on near term inflation brought trust from the market that now they think the fed knows what they are doing. However, upon reading closer to the fed's documents, they see a pretty weak and low inflation future after the current supply chain issue from covid subside. This signaled to the market that the rate interest bump will only be temporary, and future rate interest increase may not happen. Also there's fear that the economy is actually worst than it is, only now being sustained by the stimulus package and supply chain issues.
This led to a massive bought up of 10 and 30 year treasure bonds, and as we can see bond yields are dropping like a rock. The Dow on the other hand is also suffering, as well as any low PE stocks. Seems like they are rotating out of inflation/heated economy stocks and are going back into high growth due to #2. Also when the economy is bad, high growth stocks are not affected when it comes to revenue growth since their marketshare is at the beginning phase, not late phase. Company A would still grow from selling 1000 x of something to 10000 x of something because it's trying to capture from a total addressable market that sells 100 million of those things. So only established companies suffer as they lose sells to a bad economy and a disruptor, while the disruptor enjoys a low interest rate environment which is needed badly for companies that are unsustainable without such cheap money for the time being.
1. Rising interest rate is a sign of a healthy economy. Companies that are mature(which means own majority of the market share) will continue to do well in a good economy. Any signs of bad economy means the bottom line will suffer as they were at near max market share during a good economy.
2. High growth stocks are not valued at today's cash flow, but at a future cash flow discounted to today divided by an interest rate. The higher the interest rate, the lower the projected cash flow. This is a calculation done for high growth stock valuation and no matter how bullish you are about a company, you still cannot escape the fate of this calculation.
So after the June Fed meeting, the hawkish stance on near term inflation brought trust from the market that now they think the fed knows what they are doing. However, upon reading closer to the fed's documents, they see a pretty weak and low inflation future after the current supply chain issue from covid subside. This signaled to the market that the rate interest bump will only be temporary, and future rate interest increase may not happen. Also there's fear that the economy is actually worst than it is, only now being sustained by the stimulus package and supply chain issues.
This led to a massive bought up of 10 and 30 year treasure bonds, and as we can see bond yields are dropping like a rock. The Dow on the other hand is also suffering, as well as any low PE stocks. Seems like they are rotating out of inflation/heated economy stocks and are going back into high growth due to #2. Also when the economy is bad, high growth stocks are not affected when it comes to revenue growth since their marketshare is at the beginning phase, not late phase. Company A would still grow from selling 1000 x of something to 10000 x of something because it's trying to capture from a total addressable market that sells 100 million of those things. So only established companies suffer as they lose sells to a bad economy and a disruptor, while the disruptor enjoys a low interest rate environment which is needed badly for companies that are unsustainable without such cheap money for the time being.
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