Latest / Bull Market Conversations with Fexingo: Rallies, Momentum, and Riding Market Strength / How Bull Markets Are Making Growth Stocks a Trap
Transcript
- Lucas: So the broad market indexes have been drifting lower this week. S&P 500 at 7,408, down about seven-tenths of a percent in five days. The Nasdaq's down one and a half percent. Not a crash by any means, but there's a clear divergence underneath the surface. Luna: And that divergence is getting sharper by the day. I'm looking at some of the high-growth names that were market darlings just a few months ago — Shopify, CrowdStrike, Cloudflare, Palantir — they're all down five to ten percent in that same five-day window. Lucas: Right. And I want to zero in on that. The bull market is still intact — the NYSE composite is actually up a hair — but it's becoming a trap for anyone who's sitting in high-multiple growth stocks without near-term earnings visibility. The market is rotating. Luna: It feels like the story stocks are getting punished. ARKK, the innovation ETF that Cathie Wood runs, is down nearly two percent just this week. That's worse than the broader market by a meaningful margin. Lucas: Before we get into the mechanics, I want to mention something. If our money conversations have helped you think about a decision differently — maybe you rebalanced, or you looked at your portfolio with fresh eyes — we keep this show ad-free because of listeners who choose to support it. There's a page called buy me a coffee dot com slash fexingo where folks can chip in. It's not expected, it's just appreciated if the show brings you value. Luna: Yeah, and it genuinely makes a difference. Keeps us independent. I love that our listeners are the ones who make that possible. Lucas: Alright, back to the rotation. The thing that stands out to me is the macro context. Oil prices are ripping — we're seeing headlines about $100 oil becoming hard to ignore. That pushes up inflation expectations, which pushes up the odds of a Fed rate hike. The fed funds rate is at 3.63 percent right now, flat, but the market is starting to price in a hike. Luna: And higher rates are kryptonite for high-duration growth stocks. If you're buying a company that's supposed to deliver most of its earnings five or ten years from now, those future cash flows get discounted more heavily when rates rise. So the present value drops. Lucas: Exactly. And we're seeing that play out in real time. Shopify — down nine and a half percent in five days. CrowdStrike, down nearly ten. Cloudflare and Datadog, both off about five and a half percent. These aren't small moves. Luna: But the headline indexes are barely down. The Nasdaq is off one and a half percent, the S&P is off seven-tenths. So the broad market is holding up, but there's a violent rotation happening underneath. Lucas: That's the trap. If you're looking at the S&P 500 and thinking everything's fine, you might miss that your growth stocks are getting decimated. The Russell 2000 is also down about seven-tenths, but the composition matters — small caps have been lagging all year. Luna: So who's actually doing well? The NYSE composite is up — that's more value-oriented, more financials, industrials, energy. Those sectors benefit from higher rates and higher oil. Lucas: Right. And the JPMorgan report from yesterday highlighted a dramatic jump in ai themed ETFs, but even those have had a rough quarter. The AI trade is getting crowded, and when sentiment shifts, crowded trades unwind fast. Luna: I want to go back to the growth stock trap idea. Is the bull market itself creating the conditions for these stocks to underperform? Because capital flows into passive indexes, but the active rotation is what's hurting. Lucas: Well, consider this. The bull market has been running for a while. Valuations are stretched in the high-growth names. The S&P 500's overall P/E is elevated, but that's being dragged up by a handful of mega-cap tech stocks. The rest of the market is actually reasonably priced. Luna: So the growth stocks that got bid up to extreme multiples during the low-rate era are now being repriced. And the bull market's continuation depends on whether earnings can catch up to those multiples. Lucas: Right. And that's where the trap is. The bull market narrative makes you want to buy dips in names like Shopify or CrowdStrike because they've been such strong performers. But this time, the dip might be structural, not just a buying opportunity. Luna: What's different this time? Rates are higher, oil is higher, and the Fed is potentially hiking again. That's a different environment than the past couple of years. Lucas: Yeah. And the market is starting to price in that risk. Look at the VIX — it's not spiking, but it's elevated. The market is nervous. And when the market gets nervous, it sells the things with the most uncertain cash flows first. Luna: That's exactly what we're seeing. Palantir is down almost seven percent in five days. That's a stock that trades at a very high multiple of sales, not earnings. When the market questions the narrative, those multiples compress fast. Lucas: And it's not just the unprofitable names. CrowdStrike is profitable, growing fast, but it still trades at a premium. It got hit almost ten percent. That tells me the selloff is about multiple compression, not just a flight from losses. Luna: So what's the investor takeaway here? If you're in a bull market and you own growth stocks, what should you be looking at? Lucas: I'd say look at earnings visibility. Can the company deliver strong earnings in the next two quarters? If not, the market might punish you. And look at valuation — not just P/E, but price to sales, price to cash flow. If those are in the stratosphere, be careful. Luna: Also, watch the macro. Oil above $100, Fed hiking odds rising — those are headwinds for growth. If you're overweight growth, maybe it's time to rebalance into value or energy. Lucas: I think that's the smart play. The bull market isn't over, but it's changing character. The easy money in growth stocks from 2020 and 2021 is not coming back. We're in a different regime now. Luna: And the trap is thinking that because the market is still near all-time highs, every dip is a buying opportunity. Some dips are just the beginning of a longer adjustment. Lucas: Exactly. The NYSE composite being up while growth stocks are down is the market telling you something. It's saying, 'I'm still willing to buy, but I want earnings, not promises.' Luna: So listen to the market. It's speaking pretty clearly right now. Lucas: It is. And as always, we'll keep watching how this plays out. The rotation could deepen, or it could reverse if we get a dovish Fed surprise. But for now, the growth stock bull case has a lot more questions than answers. Luna: Good conversation. Let's see what next week brings.