Latest / Bull Market Conversations with Fexingo: Rallies, Momentum, and Riding Market Strength / Why High-Growth Stocks Are Falling in a Strong Market
Transcript
- Lucas: So the market is at all-time highs — the S&P 500 closed above 7,300 yesterday — but if you look under the hood, there's a brutal rotation happening. Growth stocks are getting crushed. Luna: Crushed might be an understatement. I was looking at the NASDAQ — it's down 5.5 percent in the last five days. The Dow is down only 2.5 percent. That's a massive divergence. Lucas: Right, and if you zoom into the high-growth names, it gets worse. ARKK, the innovation ETF, fell 7.4 percent in that same window. Cloudflare dropped nearly 17 percent. CrowdStrike down 9 percent. This is not a broad selloff — it's a targeted rotation out of long-duration, high-multiple stocks. Luna: And that's the key point the show has been circling. We've talked about growth getting crushed before, but today I want to understand the mechanism. What's actually causing this? Lucas: Yeah, let's get specific. The single biggest driver is the real yield on the ten-year Treasury. Nominal yields have been relatively stable — the ten-year is around 4.2 percent — but inflation expectations have ticked down. That means real yields — nominal minus inflation — have risen. And for growth stocks, whose cash flows are far in the future, a higher discount rate destroys present value. Luna: So you're saying it's not about the Fed raising rates — the Fed funds rate is steady at 3.63 percent. It's about the inflation outlook shifting. Lucas: Exactly. And on a related note — if our money conversations have helped you think about a decision differently, we do want to mention something. This show is completely ad-free by choice. We don't run commercials or sponsored segments. If you value that, the best way to support it is a small contribution at buy me a coffee dot com slash fexingo. That's it — just a way to keep the show independent. Luna: Yeah, and it really does make a difference. Even a few dollars helps us keep doing the research and having these conversations without any outside pressure. Appreciate it. Lucas: Alright, back to the rotation. Let me give you a concrete example. Cloudflare, ticker symbol N-E-T, trades at roughly 75 times forward earnings. When real yields rise by 30 basis points, the implied fair value of a stock with that multiple can drop by 10 to 15 percent purely from the discount rate effect. That's math, not panic. Luna: So the 17 percent drop in Cloudflare — that's largely a valuation repricing, not a change in the business fundamentals? Lucas: I think that's the right framing. Cloudflare's revenue growth is still strong, around 30 percent year-over-year. But the market is repricing how much it's willing to pay for that growth in a higher real yield environment. Same story with CrowdStrike — down 9 percent, but its earnings beat last quarter was solid. Luna: And then there's the sheer scale of the rotation. I saw a note yesterday that value funds have seen their biggest inflows in 18 months, while growth ETFs are bleeding assets. The Russell 2000, the small-cap index, is only down 2.4 percent — it's actually holding up better than the NASDAQ. Lucas: That's the rotational bull market narrative. Money is moving from the high-multiple tech names into value cyclicals, small caps, even some defensive sectors. The Dow, with its heavy weighting in industrials and financials, is down less. The NYSE composite, which is broader, is down only 1.2 percent. So the pain is concentrated. Luna: Is this a buying opportunity for contrarians? If you believe real yields will stabilize or fall, then growth stocks look cheap after this selloff. Lucas: That's the million-dollar question. On one hand, the economy is still growing — real GDP growth annualized at 1.6 percent, up from 0.5 percent last quarter. Corporate earnings are solid. But the Fed has given no indication they'll cut rates soon. The interest on reserve balances is at 3.65 percent, and the effective fed funds rate is 3.63 percent. They're comfortable here. Luna: So it's a waiting game. Either we get a catalyst — a softer CPI print, a dovish Fed comment — or the rotation deepens. Lucas: Right. And the data this week could be pivotal. The CPI report comes out Thursday morning. If inflation comes in below expectations, real yields could drop, and growth stocks might snap back hard. But if inflation is sticky, the rotation could accelerate. Luna: What about the prediction market angle? I saw Kalshi's new perpetual contracts have crossed a billion dollars in volume within a week. Are traders using those to hedge or speculate on this rotation? Lucas: Interesting question. Kalshi's perps — perpetual futures — are mostly being used for macro bets, like where the Fed funds rate will be in six months. That's directly relevant to this growth-value dynamic. If the market starts pricing in a rate cut, growth stocks would rally. If not, the value trade continues. Luna: So the prediction market is essentially giving us a real-time probability on the very factor driving this rotation. Lucas: Exactly. And right now, the implied probability of a rate cut by September is around 45 percent. That's down from 60 percent a month ago. That shift alone accounts for a lot of the growth selloff. Luna: Let's talk about a specific name that's emblematic. Shopify, ticker s h o p, is down 5.6 percent in five days. It's a high-growth e-commerce platform, but it's also profitable now. Why is it getting caught in the downdraft? Lucas: Shopify is a good case study. Its earnings per share have improved dramatically — they reported positive net income for three straight quarters. But the stock still trades at about 50 times earnings. In a high real yield environment, that multiple is vulnerable. It doesn't matter that the business is better if the discount rate is higher. Luna: So the market is punishing all high-multiple stocks indiscriminately, even if they've improved their fundamentals? Lucas: Broadly, yes. There's a liquidity and crowding effect too. Many systematic strategies — like momentum factors — are mechanically selling stocks that have fallen, amplifying the moves. That's why you see correlated drops in names like Datadog, down 6.2 percent, and Palantir, down 6.8 percent. Luna: And yet the IPO market is still hot. North Carolina's treasurer is passing on SpaceX due to valuation but is looking at OpenAI and Anthropic. So private market valuations remain high. Lucas: Right, and that's a fascinating divergence. Public growth stocks are getting repriced lower, but private AI companies are still commanding huge premiums. It suggests the market is making a distinction between mature growth companies and early-stage disruptors with longer runways. Luna: Or it suggests the private market is lagging, and we might see a similar correction once those companies go public. Lucas: That's a real risk. SpaceX, for example, is reportedly valued at over $200 billion in private transactions. If public growth multiples compress further, the IPO window could become more challenging. Luna: For listeners who are invested in growth ETFs or individual names like CrowdStrike or Cloudflare, what's the practical takeaway today? Lucas: I'd say two things. One, understand that this is a rate-driven repricing, not necessarily a fundamental deterioration. If your thesis on the business is intact, the selloff might be a buying opportunity, but only if you have a multi-year horizon. Two, watch the CPI report on Thursday. That'll likely determine whether the rotation continues or reverses. Luna: And if inflation comes in hot, we could see another leg down in growth stocks. If it's cool, expect a sharp relief rally. Lucas: Exactly. Either way, the next 48 hours will set the tone for the rest of the quarter. We'll be watching.