Are growth stocks still valuable? – ShareCafe


The strong relative performance of growth stocks over the past few years has raised concerns about an overvaluation and the potential reappearance of the dot-com twenty years ago. This memo provides an update on the valuation picture with respect to growth stocks – as represented by the NASDAQ-100.

At first glance, NASDAQ-100 valuations look high but well below dot-com bubble levels

As the first panel of the chart below shows, the NASDAQ-100 Index (followed by the HNDQ and NDQ Hedged and Unhedged ETFs respectively) has performed very well in recent years. From a performance standpoint alone, this strong relative performance is similar to that observed during the “dot-com bubble” twenty years ago.

This time around, however, that strong performance was well supported by the underlying fundamentals of strong relative earnings growth. At least until recently, the NASDAQ-100 futures price-to-earnings (PE) ratio had moved widely sideways and averaged just under 20 (panel 2). Since the COVID crisis, however, prices have increased relative to earnings, so the PE ratio rose – reaching a month-end peak of 30 at the end of August 2020. At the end of July 2021, it was trading at a forward PE ratio of 27.2.

Is it expensive? The PE ratio remains well below the peaks reached during the dot-com bubble – comparisons with this period at this point therefore remain far from the reality. Since the mid-1980s, the PE ratio has averaged around 25, although excluding the bubble years from 1997 to 2004, the average was only 21.

In this regard, the PE ratio is now 30% higher than its long-term average excluding bubble years.

Source: Bloomberg, Refintiv, BetaShares. Past performance is no guarantee of the future performance of any index or ETF. The performance of the index does not take into account the fees and costs of ETFs. You cannot invest directly in an index.

Low interest rates have boosted equity valuations around the world

Of course, PE ratios in many markets are high these days – aided by very low interest rates and, to some extent, the expectation of a solid and continued rebound in corporate earnings following their cut. collapse last year. As the bottom panel of the chart above shows, the differential between the NASDAQ-100 forward earnings yield over the 10-year U.S. bond yield is around 2.4% – which is admittedly at the bottom of its range since the global financial crisis, but well above its average long-term average levels.

Compared to the global market, moreover, it is difficult to argue that the NASDAQ-100 is seriously overvalued. At the end of July, for example, the MSCI All Country World (ACWI) index was trading at a forward PE ratio of 18.3, 27% above its mid-year average of 14.4. 80 (excluding bubbles from 1997 to 2004). – compared to the 30% premium of the NASDAQ-100 index.

Another way to look at this is via the table below. The NASDAQ-100 has typically traded at a premium PE futures in the global market – averaging 44% since the mid-1980s (excluding the bubble years 1997-2004). At the end of July 2021, it was trading at a premium of 49%. Moreover, even this slightly above-average NASDAQ-100 premium in global markets could be partly justified by the downward trend in interest rates in recent years – which should tend to particularly favor growth companies with strong potential for long-term future benefits.

Source: Bloomberg, Refintiv, BetaShares. Past performance is no guarantee of the future performance of any index or ETF. The performance of the index does not take into account the fees and costs of ETFs. You cannot invest directly in an index.

Overall, so far at least, it’s hard to argue that growth stocks – as represented by the NASDAQ-100 index – are clearly overvalued, given the current level of interest rates yet. low and relative to equally above-average global equity valuations. widely. As it stands, moreover, current consensus estimates suggest that the future earnings of the NASDAQ-100 index will increase by 14% by the end of 2022, which is still a little more than expectations of the NASDAQ-100 index. 11% growth for global equities as a whole.

NDQ provides access to many of the world’s most innovative companies and aims to track the price and revenue performance of NASDAQ-100 Index (before fees and expenses).

There are risks associated with investing in NDQ, including market risk, country risk, sector risk and currency risk. NDQ’s returns can be expected to be more volatile (i.e., fluctuate up and down) than a large exposure to global equities, given its more sector exposure. concentrated. NDQ should only be viewed as one component of a diversified portfolio. For more information on the risks and other features of NDQ, please see the relevant Product Disclosure Statement, available at www.betashares.com.au.

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