JPMorgan warns ‘growth’ stocks are still not cheap

Despite some steep drops in the last six months, tech-dominated “growth” equities are still not cheap, according to analysts at U.S. investment bank JPMorgan on Monday.

The so-called FAANGs have had some of their COVID-era increases reversed this year, with Facebook down 38%, Apple down 5.7%, Amazon down 8.5%, and Netflix and Google down 35% and 10%, respectively.

According to JPMorgan analysts, typical IT firms that have yet to earn a profit have lost 30% of their value since peaking around September last year, while ‘fintech’ firms that specialise on tech-savvy banking apps and tools have lost 40%.

“As growth stocks have underperformed recently, they have derated, but are still not outright cheap,” JPMorgan analysts wrote in a client note, adding that banks and commodity-linked equities that have risen this year due to rising oil and metals prices or interest rates were still “far from pricey.”

The profitability of ‘growth’ sectors may no longer be exceptional, however the major driver remains bond market borrowing costs, which have risen this year as top central banks have laid the basis for interest rate hikes.

Years of record-low interest rates fueled the tech stock surge, but with rates now increasing, the appeal of stratospherically-valued tech firms becomes less appealing to investors, particularly if their growth trajectories sputter.

“We believe that bond yields will continue to rise during the year,” JPMorgan stated, referring to bond market charges.

“Our fixed income strategists anticipate that 10-year (Treasury) yields in the United States will reach 2.35 percent by the end of this year, while German 10-year yields will reach 0.5 percent.” Treasury yields are currently at 1.92 percent, while German bund yields are at 0.2 percent.

They also stated that the growing tensions between Russia and Western powers over Ukraine should not prompt a return to big IT names, which established a safe-haven reputation during the pandemic.

“While geopolitics may flare up before the end of the month, we do not anticipate this to endure and expect risk-on internals to resume in the spring.”