CAPE, P/E, or market cap / GDP
First, What Are Long-Term Interest Rates? Long-term interest rates—such as the yield on the 10-year U.S. Treasury bond—measure the price of borrowing money for extended periods of time. They're typically shaped by: Expectations of inflation Central bank actions (such as Fed rate decisions) GovernmenRead more
First, What Are Long-Term Interest Rates?
Long-term interest rates—such as the yield on the 10-year U.S. Treasury bond—measure the price of borrowing money for extended periods of time. They’re typically shaped by:
- Expectations of inflation
- Central bank actions (such as Fed rate decisions)
- Government debt issuance
- World economic outlook
And whereas short-term rates are directly related to central bank actions (such as the Fed Funds Rate), long-term rates capture what investors believe about the future: growth, inflation, and risk.
Why Do Long-Term Rates Matter to Growth/Tech Stocks?
Let’s begin with a investing fundamentals rule of thumb:
- The value of a stock is the present value of its future cash flows.
- Here’s where higher rates enter the picture:
- As interest rates rise, future cash flows are discounted more and more.
- That is, those future profits are less valuable today.
And growth/tech stocks—many of which have huge profits years from now—take the biggest hit.
So when long-term rates increase, the math of valuation begins to work against such companies.
Why Are Tech and Growth Stocks Particularly Sensitive?
1. They’re Priced for the Future
Most growth stocks—picture companies like Tesla, Amazon, Nvidia, or high-growth SaaS companies—invest huge amounts today in expectation of grand rewards down the line.
Their valuations are constructed on the premise that:
- They’ll continue growing fast for years to come.
- Profits in the future will support lofty prices today.
But when interest rates go up, those “big profits down the road” are discounted more, so their current value (and thus their stock price) is less.
2. They Tend to Depend on Inexpensive Capital
Startups and high-growth companies frequently borrow funds or issue equity to drive growth. Higher interest rates result in:
- Borrowing costs are higher.
- Venture capital disappears.
- Capitalists insist on profitability earlier.
This can compel companies to reduce expenses, postpone expansion, or increase prices, all of which can hamper growth.
Real-World Example: The 2022-2023 Tech Sell-Off
When inflation surged in 2022 and the Federal Reserve hiked interest rates aggressively, we witnessed:
- The 10-year Treasury yield jump sharply
- High-growth tech stocks tank, with many dropping 40–70% from peak
Investors switch into value stocks, dividend payers, and defensive sectors (such as energy, utilities, and healthcare)
It wasn’t that Meta, Shopify, and Zoom were doing poorly. It was that their future profits counted less in a higher-rate world.
But It’s Not All Bad News
1. Some Tech Companies Are Now Cash Machines
The big-cap tech giants—such as Apple, Microsoft, Alphabet—are now enormously profitable, cash-rich, and less dependent on borrowed cash. That makes them less sensitive to rate moves than smaller, still-rising tech names.
2. Rate Hikes Eventually Peak
When inflation levels off or the economy decelerates, central banks can stop or reverse rates, reducing pressure on growth stocks.
3. Innovation Can Outrun the Math
At times, the force of disruption is compelling enough to overcome increasing rates. For instance:
- The emergence of AI is allowing businesses to create efficiencies that fuel growth—even in an elevated-rate world.
Some tech infrastructure plays (such as Nvidia) can be treated as a utility, not a bet.
What Should Investors Do?
Understand Your Exposure
Not all tech stocks are alike. A growthy, loss-making AI startup will act very differently from a cash-generation-rich enterprise software business.
Watch the Yield Curve
The slope of the yield curve (short term vs long term rates) will say a lot about what the market expects for growth and inflation. A steepening curve tends to be optimistic economically (favorable to cyclicals), but an inverted curve can portend issues down the road.
Diversify by Style
An average portfolio could have both:
- Growth stocks (for long-term growth)
- Value/dividend-paying stocks (to provide cushions against rate shocks)
The Bottom Line
Increasing long-term interest rates have the effect of gravity on growth stocks. The higher the rates, the greater the pull on valuations.
But this does not imply doom for tech. It means investors must:
- Recalibrate expectations
- Focus on quality
- And remember that not all tech grows in the same environment
Just as low rates fueled the rise of growth stocks over the past decade, higher rates are now reshaping the landscape. The companies that survive and adapt—those with real earnings, real products, and real cash flow—will come out stronger.
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What Do We Mean by "Valuations Are Stretched"? When we describe the market as being "stretched," we generally mean: "Stock prices are rising more rapidly than earnings, fundamentals, or the economy as a whole justify." In other words, investors can be overpaying for too little in return. That can haRead more
What Do We Mean by “Valuations Are Stretched”?
When we describe the market as being “stretched,” we generally mean:
That can happen when:
Valuation Metrics (And How to Interpret Them)
1. Price-to-Earnings (P/E) Ratio
Example: If a stock is selling at $100 and has earnings of $5 per share, its P/E is 20.
What’s “Normal”?
As of late 2025, it’s currently sitting at 20–24, depending on the source and whether forward or trailing earnings are in use.
Why It Can Be Misleading:
2. Cyclically Adjusted P/E (CAPE) Ratio
What’s “Normal”?
What It Tells Us:
But critics argue that:
Bottom Line: CAPE is sounding the alarm. Not so much a crash, but higher risk.
3. Market Cap-to-GDP Ratio (“Buffett Indicator”)
A favorite of Warren Buffett’s.
What’s “Normal”?
Interpretation
Bottom Line: Market cap-to-GDP is saying the market is hot.
So… Are We in a Bubble?
Not necessarily.
Yes, valuations are high—historically high, actually. But don’t think for a moment that a crash is imminent. It just means the margin for error is thin. If:
But Context Matters
In 2000 (Dot-Com Bubble):
In 2025
Most high-valuation companies today (Apple, Microsoft, Nvidia) are very profitable.
So, while the ratios might look stretched, the underlying fundamentals are far healthier than they ever were in past bubbles.
What Should Investors Take Away From This?
High Valuation = High Expectation
Investors are pricing in solid earnings, innovation, and expansion. If those hopes are met or exceeded, stocks can still go up—even at high levels.
But It Also Implies Greater Risk
There is less room for disappointment. If interest rates increase further, or if earnings growth slows, prices can fall sharply.
It’s a Stock Picker’s Market
EWide indices may be overvalued. But not all stocks or sectors are overvalued. Look for:
Last Word
Are valuations stretched?
Yes—versus history. But history doesn’t repeat. It rhymes.
The trick is not to panic, but to understand the risk/reward trade-off. When valuations are high:
Hold on to companies with real earnings, good balance sheets, and a lasting advantage.
Valuations alone do not cause a crash. But they can tell you how susceptible—or resilient—the market will be when the unexpected arrives.
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