Wednesday, July 6, 2022

Megacap stock has been selling at the fastest rate since the dotcom bubble burst in 2000

Technology and large-cap growth stocks have been selling the fastest since the dot-com bubble burst in 2000, compared to low-cost companies such as banks and energy companies that pay high dividends.

Investors chilled stocks with long-term earnings opportunities – the future became more uncertain after higher-than-expected price rises in April, and inflation hit a 40-year high. Combine all ingredients for a more aggressive Fed policy response and for a possible recession along with a deep technical recession.

“This CPI data may be the most anticipated in recent history, especially for growth investors who make up the bulk of their portfolios under long-term names,” said Louise Grant, senior portfolio manager at Federated Hermes in London. This is not “welcome news”.

Global Growth Stocks have had the worst performance since 2000

Data on Thursday also showed that producer prices rose faster than expected, adding pressure on US policymakers to raise interest rates. This fueled speculation that the Fed would move three-quarters of the way to follow a 50 basis point increase last week, the biggest increase in 20 years.

Apple Inc., Google Parent Alphabet Inc. And Amazon.com Inc. Like growth stocks, this means a huge reduction in their profitability. The tech-heavy Nasdaq 100 fell 0.3% on Thursday, reducing its loss to 27% for the year.

“The primary weakness in Growth Stocks comes from the disruption of additional global liquidity and associated high depreciation rates,” said Peter Chartwell, Head of Global Macro Strategy Trading at Mizuho International. “Now the currency tightening is in full swing, which is only the beginning of a bigger trend.”

According to JPMorgan Chase, almost half of Nasdaq shares fell at least 50% from their peak, tracking non-profit tech companies and the most valuable software companies that lost all of their pandemic age profits.

Furthermore, Citigroup strategists expect growth stocks to be under pressure amid a more aggressive Fed outlook. Cheap value stocks reiterated their preference.

Growth stocks will be affected in 2022, but there are many more

Growth stocks are still expensive, especially compared to cyclic value stocks. The MSCI World Growth Index is currently trading at 22x Forward Earnings while its value index is trading at 12x. The difference between the two major investment styles is more than double the 25-year average.

These estimates of future earnings put growth stocks directly on the inflation trajectory, which in turn reduces future earnings. Look at Tesla Inc., which trades 55 times forward 12-month earnings – 16.6 times S&P’s.

This focus on profit growth seems to have been largely shaped by economic realities.

“Large-cap growth has slowed down as earnings growth slowed and economic conditions may not be favorable for them as the epidemic is at its height,” said Ed Clissold, chief U.S. strategist at Ned Davis Research. “The continuation of the tightening cycle should have more pain for growth.”

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