The Game Has Changed, So Should Investors

If you’re trying to figure out what the market is going to do this year, look no further than the fourth quarter (Q4) earnings.

The market is rapidly changing, especially for mega-tech stocks.

For years now, high-growth tech stocks have practically been the only game in town.

With industrials struggling the last couple of years, investors piled into tech stocks as they went on the hunt for growth. And in doing so, drove these tech stocks to sky-high valuations.

Fueled by ultra-low rates and an economy swimming in cash, tech investors have enjoyed outsized returns.

But as I wrote back in December, high valuations have made these stocks particularly vulnerable. Any drop in consumer confidence (and the economy) would see those excessive valuations start to come back to Earth.

That’s exactly what we’re seeing right now…

With the Fed set to raise rates as early as next month – and surplus liquidity about to dry up – we’re now finding out exactly what these high-flyers are worth. Because quite simply, some of their excessive price-to-earnings (P/E) ratios are proving to be unsustainable.

In this reporting season, stocks that missed earnings forecasts (and/or showed signs of slowing) have been wrecked…

After falling nearly 30% from its peak last November, shares in Netflix dropped another 20% last month when subscriber numbers growth slowed dramatically. And just this week, Meta Platforms (Facebook) and Spotify also both fell over 20% after reporting slower growth.

These are prime examples of what the market is willing to do when so-called growth stocks actually stop growing.

Beyond that, it also highlights something else that we’ve been discussing for some time…

You need to know exactly why you own every stock in your portfolio.

See, when the market gets bound up in a theme, a lot of stocks come along for the ride. For example, it could be lithium stocks gold stocks or even oil.

As more investors come into the market, they bid up lesser quality stocks as they try to get in on the action.

The overriding theme these past couple of years has been tech. Investors have simply bid up tech stocks – even those yet to turn a dollar – way above any realistic valuation.

But now, with many of 2021’s high profile IPOs underwater – and the drawdowns suffered by Netflix, Facebook, and Spotify recently – investors are becoming much more cautious about what tech stocks they want to own.

After such dramatic falls, it’s going to take a massive change in sentiment for these stocks to turn around.

Other stocks that don’t measure up are going to be cast aside just as quickly. So, investors who blindly hold on to stocks already past their prime could be left with substantial losses.

So far, while those former high-flyers have lost big chunks of value, Microsoft, Alphabet (Google), and Apple – despite getting caught up in the early-year sell-off – have so far held up comparatively better.

Though, in Alphabet’s case, it’s hard to know yet whether its recent burst higher was due to its proposed stock split.

Either way, as this year progresses, more and more over-valued tech stocks will be exposed. And when that happens, the market will be brutal to them.

Investors who don’t appreciate that the game has changed will be left very disappointed.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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