Why growth stocks’ surprising strength may be warning of a market bubble

Why growth stocks’ surprising strength may be warning of a market bubble Why growth stocks’ surprising strength may be warning of a market bubble Growth stocks usually lag when interest rates rise. Here’s why that’s concerning. Growth stocks’ surprising strength in the face of rising rates is reminiscent of the last few months of the dot-com bubble. /iStock Yet another warning sign of a stock-market bubble is coming from growth stocks’ surprising strength.

I say “surprising” because, despite sharply higher interest rates over the past six month, they have handily beaten value stocks. It’s usually just the opposite. Growth stocks (those trading for relatively high ratios of price to earnings, cash flow, book value and so forth) typically exhibit the greatest relative strength when interest rates are falling — not rising.

That’s because a greater share of their fundamental value comes from future years, and as a result they suffer disproportionately when higher interest rates are used to calculate those future years’ present value. Video 91/1 Skip Ad Continue watching after the adVisit Advertiser websiteGO TO PAGE AstraZeneca CFO Discusses Ambitious Revenue TargetsSee All Videos AstraZeneca CFO Discusses Ambitious Revenue Targets Play video: AstraZeneca CFO Discusses Ambitious Revenue Targets Value stocks, of course, are just the opposite. They trade for relatively low price ratios, and so more of their fundamental value comes from current earnings.

The present value of those earnings is therefore relatively immune from interest-rate increases. Don’t Short Yourself offers weekly money tips to help you earn it, stack it and grow it. I agree to the Terms of Use, Privacy Notice and Cookie Notice.

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The Treasury’s 10-year yield hit its 2026 low in late February at 3.99%, but after the Federal Reserve’s interest-rate hike this week, it’s been trading about a full percentage point higher. Yet since the February low, the Vanguard S&P 500 Growth ETF by 9.9 percentage points — 15.2% to 5.3%, according to LSEG total return data (through Sep. 16). From the end of 1999’s third quarter to when the Dow Jones Industrial Average hit its bubble high in mid-January 2000, the Treasury’s 10-year yield rose 85 basis points — almost as much as it has since this year’s February low.