As the Fed changed its stance on the current macroeconomic environment, valuations are clearly coming down. Growth stocks are seeing their multiples compress, and there is a good reason for it.
Rate hikes are expected
As rate hikes are expected, the value of these companies is considerably lower. This is because their cost of capital will tend to go up, which will inevitably raise their interest expense. Having a high-growth company that does not report profits for a long time is now something to get away from. This is one of the reasons why markets can be so interesting. Since the crash in March of 2020, the value of these growth names has continued to rise.
Inevitably some of these companies are returning to their fair valuations. Something that was to be expected, given how high some of the valuations were. The market consensus now is that these companies will have a much harder time growing if interest rates rise.
There is also the consumer demand for these services and products may stall. There was a clear spike in savings rates during 2020 and 2021, but now the savings rate has returned to its normal level around ~6%. With all the liquidity in the market, these high-growth stocks are still struggling to grow. Therefore, it is inevitable that these stocks are bound to see their valuations even lower. After all the market is pricing in the lower expected growth and high cost of capital into the value of stocks.
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