The Growth Stock Bubble Finally Burst

It’s no secret that 2022 was a veritable disaster for growth stocks.

Scores of investors — retail, professional and everyone in-between — learned the hard way that equities as an asset class had become even more vulnerable to a sharp rise in rates than textbooks would suggest due to the enormous weight of mega-cap tech stocks in benchmarks.

Equities were one giant, leveraged long-duration trade that depended heavily on the persistence of a macro regime defined by benign inflation and accommodative central banks. The macro environment underwent a tectonic shift last year, and the rest, as they say, is history.

According to data compiled by SocGen, almost 40% of the Nasdaq saw declines of 75% from their two-year highs. “With inflation proving anything but transitory, the rapid exit from the low-interest regime was brutal,” the bank’s Andrew Lapthorne wrote Tuesday. Almost 20% of the decline in global shares last year was attributable to Alphabet, Apple, Amazon, Meta, Microsoft and Tesla.

2022 was, in simple terms, a de-rating story. And a painful one at that. In even simpler terms, “2022 was more about a Growth bust than being fearful of a recession,” as Lapthorne put it.

In addition to laying bare the perils of being overweight growth stocks into an environment of sharply higher yields, rapidly rising real rates and scorching inflation, 2022 also raised uncomfortable questions about whether the FANG contingent and the stocks which comprised its several successor acronyms, were growth stocks at all. Maybe, some suggested, they were just cyclicals in disguise.

Whatever the case, those stocks were an albatross. As Lapthorne went on to point out, just seven stocks subtracted 800bps from the S&P’s annual performance.

That marked a stark reversal of fortune from late 2020, when the same stocks gave the index a steroid boost.

“Equities suffered mainly from the implosion of the QE-valuation bubble [in] long-duration Growth stocks,” Lapthorne wrote, before exclaiming, “Being short Growth was key!”

Indeed. Unfortunately, as noted above, everyone was long growth — and pretty much by definition given the clout US mega-tech shares accumulated over a decade of favorable macro and policy conditions.