Latest / Bull Market Conversations with Fexingo: Rallies, Momentum, and Riding Market Strength / Why Growth Stocks Are Crashing Despite Strong Earnings
Transcript
- Lucas: The numbers coming out of the market today are genuinely frustrating for anyone who’s been riding the momentum wave. Look at Palantir — it’s down more than eleven percent over just five days, and CrowdStrike has shed nearly fifteen percent. That is not a gradual drift; that is a violent repricing of risk in the growth space. Luna: It feels like the market is punishing companies that used to be untouchable because their valuations got too detached from reality. Is this just a technical correction, or are we seeing a fundamental shift in how capital is allocated right now? Lucas: I think it’s both, but let’s look at the macro backdrop first. Nominal GDP is sitting at thirty-two point five six trillion dollars, which sounds strong, but real growth has cooled to two point two percent annualized. When you combine slowing real growth with the Fed Funds rate ticking up to three point eight eight percent, the math for high-duration assets gets much harder very quickly. Luna: So even though the economy isn’t contracting, the cost of waiting for future profits is rising? That explains why defensive sectors like utilities and consumer staples are holding up while tech gets hammered. Lucas: Exactly. And notice the divergence between the Dow and the Nasdaq. The Dow is barely moving, up only zero point one percent, while the Nasdaq is down almost four percent. This isn’t a broad-based recession fear; it’s a targeted unwinding of speculative positions. Investors are realizing that if interest rates stay higher for longer, those distant cash flows don’t discount as nicely. Luna: But wait, didn’t most of these companies just report solid earnings? I mean, Palantir’s revenue growth is still impressive. Why are they selling off despite good fundamentals? Lucas: That’s the key tension. It’s not about the current quarter; it’s about the multiple compression. These stocks were priced for perfection in a zero-rate environment. Now that the ten-year Treasury yield is creeping up and the Fed is signaling patience, the premium for growth has to shrink. It’s a mechanical adjustment, not necessarily a failure of the business model. Luna: So if I’m an institutional manager holding these positions, am I forced to sell just to manage duration risk, regardless of how good the company is? Lucas: Often, yes. Risk parity models and factor tilts have to adjust when volatility spikes. If the VIX starts ticking up, algorithms automatically reduce exposure to high-beta names. It creates a feedback loop where selling pressure drives prices down, which triggers more stop-losses and margin calls, accelerating the decline regardless of underlying sentiment. Luna: That sounds terrifyingly automated. Are we seeing this same pattern in other high-growth areas, like cybersecurity or e-commerce? Lucas: Absolutely. Shopify is down nearly five percent, and Datadog has dropped fourteen point seven percent. The entire high-growth cohort is getting hit with the same hammer. It’s not selective; it’s systemic. The market is broadly de-risking its portfolio composition heading into Q4. Luna: So does this mean we should avoid all growth stocks until the Fed cuts rates again? Or is there a way to pick winners in this new environment? Lucas: I wouldn’t say avoid them entirely, but you have to change your criteria. Profitability matters now. Cash flow matters now. Companies that can demonstrate self-sustaining growth without needing constant capital injections are going to survive this repricing. The era of burning cash for hyper-growth is officially over in this rate environment. Luna: That makes sense. It’s basically a return to basic valuation principles after years of ignoring them. Who are the companies that actually fit that bill right now? Lucas: Look at Microsoft or Apple. They’re growing, sure, but they also generate massive free cash flow and have balance sheets that can withstand higher borrowing costs. They’re not immune to the pullback, but they’re not getting liquidated like some of the smaller cap tech names. Quality is becoming the only safe harbor. Luna: So quality over quantity. But what about small caps? I saw the Russell 2000 is down two and a half percent. Is that suffering from the same issue? Lucas: Small caps are actually in a slightly different boat. Their debt is often fixed-rate, so they aren’t immediately hurt by rising short-term rates. However, they suffer from lower liquidity. When institutions pull back from risk, they sell the easiest to sell large caps first, but then they trim small caps to raise cash. It’s a liquidity squeeze rather than a valuation squeeze. Luna: Interesting. So large caps are getting hit on valuation multiples, while small caps are getting hit on liquidity? That’s a nuanced distinction that a lot of retail investors might miss. Lucas: They definitely will. And that’s why this moment is dangerous for passive investors. If you’re just holding an index fund, you’re holding the overweight positions in the things that are currently being dumped. Active managers who rotate into value or cash are likely outperforming the benchmark right now. Luna: It’s funny how the 'stay the course' advice feels so risky when the course itself is reversing direction so sharply. Do you think this correction has further to run? Lucas: I think the easy money has been made on the way down. The initial panic sell-off is probably over, but the grind lower could continue until we see clearer signs of inflation cooling or the Fed pivoting. Until then, volatility will remain elevated in the growth sector. Luna: So patience is the new alpha. Instead of trying to time the bottom, we just wait for stability? Lucas: Precisely. And while we’re talking about patience, I want to take a quick second to acknowledge our listeners. If these conversations about navigating market shifts have helped you make better financial decisions, please consider supporting the show. It’s the smallest possible ask to keep us ad-free and independent. You can find the link at buy me a coffee dot com slash fexingo. Just a coffee if you can, nothing else required. Luna: Thanks for keeping the lights on. Back to the markets — do you think this rotation will last through the end of the year, or will growth bounce back once earnings season fully concludes? Lucas: I suspect we’ll see some bounces, but they’ll be shallow. The structural change in how we price risk is permanent until rates come down. Growth stocks might recover, but they won’t reclaim their previous dominance without a significant shift in monetary policy. Luna: So we’re in a holding pattern. Watching the Fed, watching yields, and waiting for the dust to settle before making big moves? Lucas: That’s exactly it. The market is teaching us a harsh lesson in humility. Momentum is great until it isn’t, and now it isn’t. The question is whether we learned anything from the last cycle, or if we’re just repeating history with a different ticker symbol. Luna: Here’s hoping we’ve learned enough to survive the next downturn. Thanks for breaking this down, Lucas.