This article is written exclusively for Investing.com
Interest rates have soared and as a result the stock markets are melting. Interest rates will likely continue to rise, especially at the short end of the yield curve, and that will only push expensive stocks lower as valuations reset.
This reset leads to multiple contractions in sectors and individual stock names.
While some stocks may seem like relative bargains at current levels, some still have a long way to go before falling. return to pre-pandemic valuations, especially if the Fed takes monetary policy as seriously as it seems.
Technology sector
For example, the index saw its PE ratio increase from 23.1 in February 2020 to the current 25.5. So even though the index is down about 10% since December 27, 2021, that doesn't mean it's cheap. The index would need to fall another 9.5% to return to pre-pandemic valuations. Ultimately, the big question is whether the pre-pandemic peak PE ratio is too high.
Prior to its rise from October 2019 to February 2020, the tech index never even traded with a PE higher than 20.
Even stocks like NVIDIA (NASDAQ:), which have already seen its price drop of more than 20%, could fall much further as rates rise and the multiples are recalibrated. Note that this stock traded just below $80 in February 2020 and is now trading around $250. for them in data centers. However, it also saw multiple expansions, with the PE rising to a peak of 67 times NTM earnings estimates. Now the PE has fallen to 48.9, but in February 2020 the PE was still 37.7. At that PE ratio, the stock would be worth $196 today. One could argue where the correct multiple should be and how much of the growth the company has seen over the past two years is real and hasn't been pulled forward. But you would think that if part of the reason for the stock's boom is due to the low interest rate environment, then it would seem appropriate that the valuation would also move lower if interest rates rose.
Zoom
Even stocks like Zoom Video (NASDAQ:), which have seen tremendous growth over the past two years and a stock price that has fallen more than 70%, are not cheap when taking into account with the amount of growth pulled forward and given the future growth forecast. Currently, analysts are forecasting earnings to fall 10.2% to $4.37 in fiscal 2023 and then grow just 8.3% in 2024. The company is now wrapping up fiscal 2022 and is expected to grow $4.30 in fiscal 2023. earn 4.87. Zoom is expected to have no earnings growth for the next two years and is trading at a PE of 36.7 times NTM earnings estimate – for no growth. That doesn't sound like a bargain.
So, while many stocks look great on the face of it, it's not the same as saying they're cheap or a bargain. If it turns out that future earnings growth has been pushed forward and future growth rates have been sacrificed, these stocks could fall much further, especially if interest rates rise.
