Growth stocks led the market sell-off in 2022, but it’s too soon to buy in, according to UBS strategists.
“Going forward, we think it is still too early to get back into tech stocks. While valuations for growth stocks are now less demanding, they are still high relative to value stocks,” David Lefkowitz, head of Equities Americas at UBS Global Wealth Management said in a note to clients.
“As a group, those stocks accounted 19% of the S&P 500 market cap in 2022 and -8.7 percentage points of the S&P 500 return. On average, these stocks fell -47% in 2022,” noted Lefkowitz and his team of strategists.
“Many of the most expensive stocks suffered from the surge in interest rates (which weighed on valuations) as well as a slowdown in segments of tech such as e-commerce, digital advertising, and cloud computing,” wrote Lefkowitz.
“And we think some tech companies may still be vulnerable to earnings downgrades in the months ahead as customers continue to digest the surge in purchases made in 2020 and 2021,” he added.
Minutes from the Federal Reserve’s December policy meeting released Wednesday indicate officials don’t think it’s appropriate to cut rates this year.
A higher interest rate environment impacts the present value of a company’s future cash flows. Growth stock valuations were hit particularly hard in 2022, as the central bank raised rates into a weakening economy and earnings expectations slowed.
Ines is a senior business reporter for Yahoo Finance. Follow her on Twitter at @ines_ferre