Latest / Bull Market Conversations with Fexingo: Rallies, Momentum, and Riding Market Strength / Why the Earnings Growth Trade Is Failing Growth Stocks
Transcript
- Lucas: Let's start with a number that jumped off the page this morning — the NASDAQ Composite is down 5.1 percent over the last five trading days. That's not a correction yet, but it's a thud. Meanwhile the Dow has barely budged, down just 0.4 percent. Luna: Right, the Dow's at 50,867 — basically flat. So the 'everything rally' we saw in late May has clearly fractured. Lucas: Exactly. And the question is why growth stocks are getting clobbered even though most of them just reported pretty good earnings. Take Datadog — down 15.6 percent this week. Palantir, down 15.6 percent. CrowdStrike, down 14.2 percent. These aren't companies that missed numbers. Luna: So the market is punishing them anyway. That's the part that feels confusing if you're just looking at earnings per share. Lucas: Right. And I think the key is that the 'earnings growth trade' has become crowded. For the last year, investors piled into high-growth names because they were the only place to get revenue expansion above 20 percent. But now the market is repricing how much it's willing to pay for that growth. Luna: Because of interest rates? The Fed's still at 3.63 percent. Lucas: Partly. But I think it's more about real yields. The ten-year Treasury yield has been creeping up — it's around 4.3 percent now. When the risk-free rate gives you 4.3 percent, the premium you demand from a high-growth stock goes up. If Datadog trades at 80 times earnings, the bar for future cash flows is incredibly high. Luna: And if those future cash flows get pushed out even a year, the present value craters. Lucas: Exactly. That's the duration effect. Growth stocks are effectively long-duration assets — most of their value comes from earnings years down the road. When real yields rise, those distant earnings get discounted more heavily. So even if the company executes perfectly, the stock can fall. Luna: Let's look at the IWF — the iShares Russell 1000 Growth ETF. It's down 4.7 percent this week. That's a broad growth basket, not just a few names. Lucas: And compare that to the Dow, which is heavily value and industrials. The Dow's down only 0.4 percent. That's a 4.3 percentage point spread in one week. That's not random volatility — that's a rotation. Luna: Where is the money going? Into bonds? Or just sitting in cash? Lucas: Some into bonds — the ten-year yielding 4.3 percent is attractive. But I think a lot is rotating into defensive sectors within equities. Utilities, healthcare, consumer staples. The Russell 2000 small-cap index is down 2.5 percent, so it's not like value is booming. But it's holding up better. Luna: That makes sense with the jobs report from last week. Hot payrolls mean the Fed stays on hold, rate cuts get pushed further out, and the growth narrative gets challenged. Lucas: Right. Chair Warsh basically said as much — the economy doesn't need looser policy. So the market has to adjust to 'higher for longer' again. And growth stocks are the most sensitive to that. Luna: I want to go back to Palantir specifically. It's down 15.6 percent this week, but their government contracts are growing, and they just launched a new AI platform for defense. Why the sell-off? Lucas: Valuation. Palantir was trading at over 100 times forward earnings before this drop. Even a slight change in the discount rate crushes that multiple. The business is fine, probably. But the stock price was pricing in perfection. And perfection is fragile. Luna: So the lesson is that even in a bull market, you can't ignore valuation just because the narrative is strong. Lucas: Exactly. And I think this is the defining feature of a 'rotational bull market' — the overall index can grind higher, but the leadership changes. If you're holding the same high-growth names from six months ago, you might be down even as the S&P 500 is near all-time highs. Luna: The S&P is at 7,384. That's down 2.8 percent this week, so even the broad market is taking a hit. But year-to-date it's still positive. Lucas: Right. So this isn't a crash. It's a repricing. And I think the key for listeners is to ask: is the business still growing at 20 percent plus? If yes, the sell-off might be an opportunity. But you have to be willing to tolerate more volatility. Luna: Let's talk about Shopify. Down 11.7 percent this week. They reported decent numbers — revenue up 25 percent. But the market yawned. Lucas: Shopify is a great example. The company is executing well, but the stock had rallied a lot into earnings. The market was already priced for good news. So when the news was merely good, not spectacular, sellers took over. Luna: That's the 'buy the rumor, sell the news' pattern. Lucas: Exactly. And I think that's happening across the board. The ARKK innovation ETF is down 8.3 percent this week. That fund is full of high-growth, high-duration names. It's getting hit from both sides — rising rates and profit-taking. Luna: So if someone is listening and they own some of these names, what's the move? Hold, sell, buy more? Lucas: I'd say hold unless you need the money soon. Selling into a panic is rarely the right call. But I wouldn't be piling in with new money until we see the selling stabilize. Look at volume — if volume is spiking and the stock is still falling, that's institutional distribution. Wait for the volume to dry up. Luna: That's a good rule. And speaking of institutional moves, the Dow's resilience suggests big money is rotating into quality dividend payers and defensive names. Lucas: Yeah. And that's a signal that the market is getting more cautious, even if it's not bearish. It's a 'risk-off' tone within a bull market. You can still make money, but you have to be more selective. Luna: Let's zoom out for a second. The real GDP growth rate just came in at 1.6 percent annualized in the first quarter. That's up from 0.5 percent in the prior quarter, so the economy is accelerating, not slowing. Lucas: Right. So the macro backdrop is actually fine. This isn't a recession sell-off. It's a valuation adjustment. And those can be healthy — they reset expectations and create entry points for the next leg up. Luna: But they're painful if you bought at the top. Lucas: No question. And I think that's why it's so important to understand what you own. If you bought Palantir at $160 and now it's $135, you're down 15 percent. But if the thesis hasn't changed, and you have a long time horizon, that loss is only on paper. Luna: Yeah, and on that note — and I don't want to break the flow here — but we get a lot of emails from listeners who say these conversations help them think through their own decisions. And we're really grateful for that. Lucas: Absolutely. And look, we keep this show ad-free because a small group of listeners chips in monthly through buy me a coffee dot com slash fexingo. That support literally funds the time we spend digging into numbers like these. Luna: It's a small thing that makes a big difference. So if you find value in these episodes and want to keep them coming without ads, that's the way to do it. Lucas: Right. And back to the market — I think the next thing to watch is whether this rotation deepens. If the Dow starts to slip too, then it's a different story. But for now, it's a growth stock problem. Luna: And earnings season is mostly over. So the next catalyst is the Fed meeting in July. Until then, we might see more churn. Lucas: Exactly. Churn with a downward bias in growth, sideways in value. That's the June 2026 bull market in a nutshell. Not dead, just rotating. Luna: And maybe that's healthy. A bull market that never corrects becomes a bubble. Lucas: Right. So this week's pain could be setting up the next leg higher. We just have to be patient.