Growth Stock Valuations Start to Matter Amid Mounting Signs of a Key Market Shift
Extended valuations have been fodder for the bears for a long time, but simply have not mattered much — until now.
You're reading 0 of 1 free page.
Register to read more or Unlock Pro — 50% Off Ends Soon
The market recovered fairly well from Walmart's WMT poor earnings report on Thursday, and the indexes are still technically in good shape. However, there are signs that the market is undergoing a shift in character. The problem is that valuations for growth stocks are very high, and this is starting to matter.
The corrective action in Walmart on Thursday spilled into other areas of the market where there were lofty P/E ratios despite relatively mild growth rates. Walmart could not justify a P/E ratio of over 40 when it was cutting EPS growth for fiscal year 2026 (January) to just 7% and to 11% in the following year.
This reaction caused market players to examine other leading growth stocks more closely, such as Axon Enterprise AXON, which has been chugging along with a P/E of around 140 despite an EPS growth of 25%. Klavijo (KVYO) is another example, with a P/E ratio of 94 and an EPS growth of 10% for 2025.
These extended valuations have been fodder for the bears for a long time, but it simply has not mattered much. The Magnificent Seven names were the first group to suffer because of valuation concerns, but other growth stocks have now stepped up to replace them. Now, those names are being questioned just like the Mag 7.
Another problem that popped up on Thursday was weakness in banks. Goldman Sachs GS took a nearly 4% hit and JPMorgan Chase JPM fell 4.5%. These financial stocks are not overvalued like the growth names, but they are technically extended and more expensive than normal. The weakness in the group is a warning sign that the character of the market is shifting.
The good news is that the money leaving growth stocks is rotating into other areas of the market and is not heading for the sidelines. Value stocks are seeing some inflows, and long-suffering groups such as biotechnology IBB had a positive day on Thursday as growth stocks fell.
There is a lot of danger in this market as there still are worries about tariffs and the potential for upticks in inflation. If valuations continue to adjust, it is going to cause even more volatility, so stock selection will be even more important,
So far, the selling pressure is not broad, and breadth has been relatively strong. However, if that shifts, then it will be important to reduce market exposure.
We have a little rebound action on Friday morning, but market players are tentative and will have to deal with option expiration.
At the time of publication, Rev Shark had no positions in any securities mentioned.
