Shares of high valuation growth stocks bucked the broad sell-off in the market today, with most finishing positive. Shares of Peloton (PTON:NASDAQ), Roblox (RBLX:NYSE), and Zoom (ZM:NASDAQ) all posted significant gains in Tuesday’s trading session. Peloton shares spiked by 9%, while Roblox and Zoom finished 13% and 6% higher. Other big winners were DocuSign (DOCU:NASDAQ), Teladoc (TDOC:NYSE), Draftkings (DKNG:NASDAQ), and Pinterest (PINS:NYSE), which all saw their shares finish above 5%.
These stocks, most of which are termed ‘Cathie Wood” stocks have been slaughtered in a market rife with pessimism from inflation, interest rate hikes, and a possible recession. The highest inflation levels in 4decades have forced the Fed to be ultra-aggressive on rate hikes. After June’s FOMC meeting, the Federal Reserve announced it was hiking interest rates by 75 basis points, its highest since 1984.
Despite the Fed’s attempt to rein in inflation, many believe that this could steer the economy into a recession. In such an environment, high valuation growth stocks tend to take most of the hit from investors eager to get out of the market. For example, Peloton, Zoom, Roblox, and Teladoc have seen their valuations decline by over 80% this year. Given that Fed Chair has signaled that there would be more rate hikes this year,
Albeit, it appears that gloom and doom from the purported rate hikes which have seen about $9trn wiped off from the market appear to have fizzled out, given today’s price action. The riskiest parts of the market – mainly tech stocks – were clearly the best performers with the Nasdaq finishing 1.4% higher, while the S & P 500 barely eked out a gain of 0.16%.
Energy stocks were the surprise underperformers of the day, as oil prices slumped below $100 for the first time since May 10. Shares of Marathon Oil (MRO:NYSE), Devon Energy (DVN:NYSE), and ConocoPhillips (COP:NYSE) all lost more than 5% from their opening share price. The bigger players like Chevron (CVX:NYSE), Occidental Petroleum (OXY:NYSE), and ExxonMobil (XOM:NYSE) suffered slightly lower losses of 2.2%, 2.6%, and 3.13% respectively. Energy has been the best performing sector so far this year and remains the only sector that is positive for the year.
Though tech stocks and high valuation growth counterparts staged a comeback, there is still a lot of doubt that this rally is sustainable in the long term. One major reason is that the fundamentals are yet to change given the current macroeconomic outlook. The war in Ukraine, the reopening of China, and OPEC members not meeting their production targets are still catalysts that could spur energy stocks higher and send high valuation stocks lower.
All eyes would be on President Biden next week as he visits Gulf states ‘hat-in-hand’ to make a case for increased oil production. There is an unspoken consensus that oil could continue to go higher if the war in Eastern Europe continues, and if the proposed price cap on Russian oil scales through.
Judging from history, U.S. equities tend to perform well in July. But this would not be sufficient to lift investor pessimism as investors say they are bracing for more pain ahead. Economic data showing declines in metrics ranging from factory output to retail spending have exacerbated investor concerns.
Investors this week would be awaiting the Friday release of the June jobs report, which will shed insight on the trajectory of the U.S. economy. So far, the job market has shown little sign of faltering this year—offering one encouraging sign for the economy—even as other data in recent weeks have pointed to an economic slowdown.
More disappointments may await investors later this month when major companies begin reporting second-quarter results. It is believed that these companies’ balance sheets this quarter would be smeared by rising inflation.