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Growth Bubble Bursts: All Good Things Come To An End



  • Growth names profited from ultra-lose monetary policy and massive stimulus spending.
  • With rising rates, that tailwind has ceased to exist.
  • Valuations were very high across many growth names, and now they are coming back down to earth.
  • Value has easily outperformed growth over the last month, and more of the same could be coming, as growth names continue to underperform.
  • Looking for a helping hand in the market? Members of Cash Flow Kingdom get exclusive ideas and guidance to navigate any climate. Learn More »

Article Thesis

During 2020, and into early 2021, high-flying trendy stocks that belonged to companies with a strong growth outlook were a solid play, generating attractive returns in many cases. The gains enjoyed by many of these stocks were driven by multiple expansion in many cases, however. That can't go on forever, of course, and we are witnessing in many growth stocks that multiples are compressing, even if underlying results are strong.

Not all growth stocks are trading at bubble-like valuations, but it looks like the recent growth underperformance could persist as multiples come back to earth. This is an especially pronounced headwind for stocks trading at extremely high valuations, and for funds that invest in such stocks, such as the ARK family. Many of these stocks and funds have already hit bear market territory, and more could come in the coming weeks.

brown bear with blue eyes

Source: unsplash.com

A Solid Trade Thanks To Ultra-Lose Monetary Policies

About a year ago, when the pandemic gained strength around the globe, equity markets started to decline. There was a quick and violent sell-off, but stock markets bottomed out in late March and have risen to new all-time highs since then. Gains in stocks from the nadir were not created equal, however, as some stocks performed much better than others.

Among the best performers, there were many companies that had a strong underlying growth outlook or at least a strong perceived growth outlook. Valuations didn't matter too much to the market, and stocks that were already expensive rode the fiscal and monetary stimulus wave to even higher valuations.

Source: Fed website

As central banks were printing trillions of dollars, while governments provided additional stimulus to companies and consumers, there was a flood of ultra-cheap money that had to be deployed somewhere. Some of that money was finding its way into

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This article was written by

Jonathan Weber profile picture
Jonathan Weber holds an engineering degree and has been active in the stock market and as a freelance analyst for many years. He is an active author on Seeking Alpha since 2014.    
According to Tipranks, Jonathan is among the top 1% of bloggers (as of August 1, 2023). 

Jonathan is interested in income stocks and value stocks primarily but does also follow some growth stocks. 

If you want to reach out to Jonathan, you can send a direct message here on Seeking Alpha.


I work together with Darren McCammon on his Marketplace Service Cash Flow Club.

Analyst’s Disclosure: I am/we are long ABBV, ET, EPD, BHP, HT, CNQ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (378)

Hender profile picture
net present value and PE compression would apply to all stocks, not just growth stocks.
How about the 1.9 Trillion stimulus? Seems to me the market has a way to go yet on all that funny money.
Bikerron1 profile picture
Enjoyed your article very much. Also enjoyed reading other peoples comments. This isn’t investing anymore it’s nothing more than gaining. Been doing it for more than 45 years and it’s getting harder and harder each year to make a good decision.
Jonathan Weber profile picture
Thanks, glad you liked it! In pockets of the market it looks like gambling indeed
Does anything think or is now allowed to even think that the chicoms would prefer we stay home and die inside our souls than go outside and at least leave the phone in the pocket? just asking for a friend
last time we saw this sector rotation, tech sold off and then rallied to new highs.. i suspect the same will happen again as the long term growth stories are still intact and the great tide of an improving economy will move most names higher, including tech. the transition to digital and the dominance of tech will continue unabated. The changes wrought under Covid are not temporary - it was an acceleration of a trend already in place. Until we see actually high interest rates (the current is still at historic lows) good chances these names pop again. not mention if a "green new deal" gets passed....
@KevjustBrowsing interest rates are popping and I am so happy I sold AMD and Palantir at highs! (92.40 and 42 dollars respectively)
@dmzporter im impressed about selling palantir at its high! good call. but it will slowly makes it way back to $42. whats your target to get back in?
Active_Trader profile picture
Excellent, #1 and #4 listed on the $NDX who's indices-future is red re m.investing.com/indices/ind... are $AAPL and $TSLA re slickcharts.com/nasdaq100 The $SPX soon to be red followed by $DJI Enjoy the carnage on a wonderful Black Crash Monday. 🐻❤ Enjoy the Depression. There never will be a cure for the Coronavirus Rex and the demented economy at large more so as bond rates increase. Stimulus means jack, what a waste of taxpayers' dollars. tdtiah2h @Profit_Maker stocktwits.com/Profit_Maker xo Good health to all.
Growth bubble bursts? Nah, not until after 1-2 more stimulus! It'll be a whiplash week but ride the market up through April!
six-oh profile picture
Two weeks ago, the author penned a bullish article on Palantir. Since then PLTR is down 32% and SPY is up 3%.

Now he's calling a market top, claiming that the "growth bubble has burst" and advocating buying "value" stocks.

I suspect in 2 weeks after tech has sharply rallied again, he will write another bullish PLTR article.
Bobstert profile picture
@six-oh To be fair, his article on PLTR was only very mildly bullish, and for those with a long term. It concluded "For those investors with an investment horizon of a DECADE or more ... Entering a position by either selling cash-secured puts or covered calls seems like an opportune choice, due to the very high option premiums one can get right now."
Jonathan Weber profile picture
I explained that I like PLTR fundamentally but think the valuation is very high, and that selling put options for a better entry price is favorable versus buying shares outright. Did you read that article?
six-oh profile picture
@Jonathan Weber

Yes, I read the article, unfortunately. You recommended buying calls, and selling puts, both bullish moves. You actually justified the valuation of Palantir by comparing it to the valuations of PTON, SNAP, BYND, and TSLA. What's worse than penning that article, is not owning your own recommendations.
John Gilluly profile picture
Great article. Could not have said it better for all the value investors who sat on the sidelines while these gazelles hopped and jumped all over the place. Now it's over.

Value has led growth - exiting every recession since world war II. SABR, HT, CLDT, CEM, PVAC, OIS - They all have to run. Small cap value: travel , hospitality, energy, and basic materials.
Well last year around this time I had 81K in my account which crashed to 55k when the country shut down. I then went heavy into the digitization trade and it went crazier than I thought it would. I wish I would sold out at the top but I am out now with 130k in the account.. I feel bad leaving about 20k in the game but if last year's me saw what my account was now, I bet he would be happy.
Jonathan Weber profile picture
You still did well, congrats!
@Jonathan Weber Thank you, I need the encouragement. I need to get my head straight and figure out what the next bull market is. I am pretty sure that the re-opening trade has made the "easy money" already but there will be a new bull market showing up soon
watchingfromabove profile picture
Did you mean "ultra loose monetary policy"? What does ultra lose monetary policy mean?
Excellent article. key question is the eternal one: For high-growth stocks, what is the P/E multiple and/or revenue multiple that will prevail the next phase of time?

We all know the historical averages of multiples for earnings, and for revenue, are wildly exceeded today over the spectrum of the market, but especially higher for the growth/momentum plays. Rotation does seem to be in-process now, with growth stocks losing that high-multiple shine (despite doing fine as a business, beating projections every quarter), and value/commodity/neglect-eds coming back. Driven, as the author contends, by the specter (un-avoidable over time) of rising inflation and rates.

Today's markets demand we be nimble as trends emerge and then accelerate.

Accordingly, as I exit high-flyers, I just bought ultra short treasuries EFT and base metals, and precious metals, and rare metals EFT's, cuz interest rates and commodity prices just gotta go up from here. Volatility will be the continuing watchword going forward as "rotation" and rates rise emerge. -- Happy Investing, MK
Jonathan Weber profile picture
@Montgomery Kersten
Glad you liked it! Metals could be solid, but have already run up quite a lot, was even better half a year or so ago
@Montgomery Kersten What Treasury ETF are you referring to ...it involves a long bond right...B.C short term rates will be defended with continued monetization for a long time. I like Put options on TLT as well for downside protection.

The Multiples question is a excellent one.. i would definitely enjoy a discussion there...i think it will be related somewhat do how spooked markets get by yields... if we cross below 50 day M.A for a considerable period and enter a longer term side ways trading period...then valuations will be certainly lower than if we are able to maintain a upward trendline of this bull market.
Jonathan, nice work, again. A solid read & you state your views clearly... I have a few super aggressive micro cap BioTechs, that are growth, I'm overweight in one position, lost some gains on paper last week, but hedged it by selling covered calls... All the premiums went into value stocks, Oil & REITS, which are doing nice. And paying solid dividends.... I will hold them, the growth stocks, as I believe the story will play out well given time...

Largest single position is AAPL, even after its recent haircut, I am > over 300%, due to time in the market, NOT timing the market. AAPL's P/E is at historic all time multiples, and there is constant discussion if it is warranted.. I believe it is, as the business model is changing...

So as it has been said here, it is a market of stocks, not a stock market. And there is more than one way to make money, it is not merely Growth or Value, I prefer a blend of both.
Jonathan Weber profile picture
Thanks, glad you enjoyed it!
If yields go back to pre-pandemic levels (or even higher) the house of cards will collapse.
Jonathan Weber profile picture
Thanks for your comment!
Impressed you've hung around responding to so many comments. Thanks! I share your concerns about valuations, as do many others.

What to do is the issue for some of us.

I own ARKF, on the thesis that fintech is the most durable and reality-based of the ARK thematics (bitcoin aside). I figured I'd let the experts at ARK figure out the best companies and spread the risk around 30-40 names, since I have no expertise but my gut, nor the time to evaluate and chose among stocks in the fintech arena. Also like many people I use and see fintech at work, whether it's Venmo or Square or Paypal, and am familiar with growing giants like MercadoLibra.

The recent drop was not unexpected but despite it, I'm still up 140% in a year from March, which is a ridiculous gain. I agree ARK funds are ahead of their skis but tech disruption and growth names remain a theme with legs and I want to stay invested since I have a long-term outlook. Thus folks like me have to decide: Sell and take profits and hope to get in lower down the road? Or just ride the boat through the storm and know the wave will continue to power ahead?

It's not an easy decision.
Jonathan Weber profile picture
Agreed, fintech looks like one of the better ARK themes!
Captain Value profile picture
@RealRural I think the decision is easy, it has four letters and rhymes with “bell”
six-oh profile picture

I think that your reasoning is good. I'd rather pay Cathy Wood 0.75 AUM to manage my capital in the disruptive tech space than follow advice of random SA authors. I think that you are going to do just fine.
BossHoggg profile picture
Spot on and understated, as usual. There are also some deep value names, like X, that have been doing nicely lately. It seems there was a bit of a barbell, with massively undervalued stocks on one end and massively overvalued on the other. Hopefully that will continue to unwind as interest rates continue to go up.
Jonathan Weber profile picture
Thanks, glad you liked it! Will take a look at X.
BossHoggg profile picture
@Jonathan Weber I think there’s always a narrative to support under or overvaluation. Obviously the tough part is to figure out if that narrative holds water. X was supposedly a dinosaur and un-green. I didn’t do any thorough research on it but I think the narrative was that they were behind on the “recycling” variety of steel mill.
Jonathan Weber profile picture
I agree that rebranding or moves to more "en-vogue" business models can lead to substantial upside potential. Could be true for X if they make the right moves
Without big wage growth , inflation measured in market terms is a pipe dream . Stimulus is temporary, reopening the economy is temporary, rising yields will create a temporary reverse wealth effect and hit housing and stocks and the fed will be forced to defend those asset values . The great thing about the market is that it’s very efficient in altering asset values very quickly so we should buckle for whatever volatility is ahead.
@cpick8979 so what is your plan?
Valued Rug profile picture
@cpick8979 If you’re a long term investor, I say ride that boat! With 140% gain you’ve got a nice margin of safety to help stomach those waves.
Pypl and sq can offer ethereum or token trading overnite and blow your short out
fleveneur68 profile picture
Thank you for your article but you’re basically summarizing what has already happened and what we already know. I wish you had written this article couple of weeks ago, raising some concerns about interest rates and that tech stocks were at risk. Some investors mentioned that a correction was coming after GameStop issue, because we had reached the extreme and this usually happens towards the end of a long crazy bull market.
I made mistakes to buy some Ark etf, but I also sold half of my stock few weeks ago feeling that like you said multiple cannot go on forever. Now I also believe there will be major shifts in many industries. Tech is not going away, in contrary, so is BioGenetic, Robotics , renewable NRJ. Lots biz will close because they were already on the verge of failure, they were not thriving but surviving. That said, where to invest? I think some value stock have potential. The reopening will have Consummer spend , Restaurant, travel, retail. People have saved money, probably invested too, but we are social creatures and we crave our outdoors gathering. I’m looking for some ideas.
Jonathan Weber profile picture

Thanks for your comment. We have been warning on TSLA etc. for a while now
@Jonathan Weber What happened to TSLA and will it make a comeback?
Jonathan Weber profile picture
@johnny corsaro

The company is not doing badly operationally, but its valuation was just extremely high, and is still very high. With competition increasing, shares could decline further
Sunil Shah profile picture
@Jonathan Weber
RE Nvidia, I made the exact argument in when the valuation chasm between Nividia and Micron was a absurd on this article
"The Absurdity Of Micron's Valuation Versus Nvidia
Aug. 30, 2020"

Since then Nvidia is DOWN about 4% and Micron is UP around 93%
(But alas, it didn't stem an avalanche of vitriol on my article, where I DARED to question the Nvidia-growth-at-any-price argument of the NVDA bulls)

summary of article:
The focus will be on comparing the operating metrics and prospects of two companies in the ‘New Oil’ of this century: Data.
Micron and Nvidia each focus on different aspects; one on the storage of digital memory, and the other on processing that data to use.
Nvidia has eclipsed Micron's operating history, mainly due to the penetration of their graphic chips (GPU’s) previously used in gaming, but now in data centers.
What is less known is the memory intensity of GPU’s; Micron is linked at the hip to Nvidia, despite transient weakness.
Micron's valuation offers massive re-rating potential, given the common tailwind from data centers that's propelled Nvidia. Buy Micron.

Even today, IMO, there is material downside on NVDA given the valuation and the higher time value of money with a real and rising discount rate.

As for Tesla....
Jonathan Weber profile picture
@Sunil Shah
Thanks, nice call on MU! Congrats =)
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