Growth stocks suffered on the stock market in 2022. European (Dassault Systèmes, etc.) and American (Amazon, Alphabet – Google, Nvidia, etc.) technology giants, French luxury and cosmetics giants (KHOL – Kering , Hermès, L’Oréal and LVMH) and other fast-growing listed companies (Tesla, etc.) suffered from the impact of the explosion in long-term rates between December 2021 and October 2022 on both sides of the Atlantic.
Indeed, the theoretical valuation of this type of stock market value is the most sensitive to the phenomenon of rising interest rates, in the valuation models of financial analysts. The sharp drop in long-term rates observed in recent months, against a backdrop of lessened fears about inflation and growing worries on the economic growth front, has given these equities a real breath of fresh air. However, are growth stocks really out of the rut? Will 2023 mark the return of the long-term bull market?
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At the current stage, it is difficult to answer these questions definitively, as many uncertainties remain, whether on the trajectory of inflation, the monetary policy of the Fed and the ECB or economic growth, all factors that will influence the evolution of long-term rates.
In 2022, “the acceleration of the rise in long-term rates has hit the equity market hard (and in particular growth stocks, editor’s note)”, notes Nicolas Domont, of Optigestion, interviewed by Capital, who explains that “the surge in the risk-free rate (the yield on 10-year government bonds, editor’s note) has mechanically weighed on theoretical PERs (i.e. the number of years of profits that listed companies should pay for themselves in Stock market – according to the calculation models of financial analysts) – traditional gauge of the degree of high price of shares.
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It must be said that since 2009 (i.e. during the years of ultra-accommodative monetary policies by the major central banks, which for a long time compressed long-term rates), “the difference in remuneration between the yield of the free cash flow (operating cash flows after investments of listed companies, compared to the combination of market capitalization and net financial debt, editor’s note) and the risk-free rate (of government bonds, deemed extremely safe and without risk of not -reimbursement, Editor’s note) has long argued in favor of actions. A phenomenon undermined last year by the explosion of long-term rates”, explains Nicolas Domont.
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On the stock market, the TINA phenomenon (there is no alternative – “there is no alternative” to shares, for an investor) is behind us. Now, with a yield on the 10-year US government bond at nearly 3.5%, “investors have an attractive alternative investment, especially since it is difficult to remain liquid when inflation is so high”, argues Nicolas Domont.
Over the next few quarters, on the stock market, stocks of growth companies should react to the trajectory of long-term rates and adjustments to earnings estimates (made by financial analysts), which could unscrew in the event of a larger shock. than expected on economic growth.
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From a technical analysis perspective alone, the US 10-year rate has recently bounced off the very large support bundle of 3.23-3.50%. A possible breakout of the 3.87-3.91% resistance would be a “positive” (bullish) signal for the 10-year rate (and therefore a negative signal for stocks of growth companies. Conversely, a continuation under pressure 10-year rates could allow growth stocks to do well.
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