Growth stocks have largely been resilient over the last month or so. But rising bond yields could be a danger sign for shares that trade at high price-to-earnings (P/E) multiples.
I think this is something investors should take care of. While I’m not forecasting a stock market crash, being thoughtful about what to invest in is never a bad thing.
Bond yields
Since the start of the month, the yield on 30-year US government bonds has gone from 4.1% to around 4.5%. And the yield on UK gilts with the same duration has gone from 4.5% to 4.8%.
That means someone looking for a 30-year investment can get a 4.8% return just by buying bonds. And the risk is relatively low – the UK government is unlikely to not pay its debts.
Investing £10,000 at 4.8% would get me £14,400 over 30 years. So in order to consider anything else – shares in a business, for example – I’d need to think it could generate more than this.
The more bond yields increase, the more a company has to make for its shares to be investable at its current price. And the movement in the bond market puts pressure on growth stocks.
Nvidia
Nvidia’s (NASDAQ:NVDA) a great example. The company’s revenues and profits have been growing explosively and the stock is up 224% over the last 12 months as a result.
As I write, the current share price is $139. So for the investment to be a viable option, the business needs to be able to generate more than $6.25 a year on average for the next 30 years.
Analysts expect the company to generate a total of $16.85 in earnings per share between now and the end of 2027. By that point, the bond will have returned the equivalent of $25.
That means Nvidia’s going to have to grow – a lot – to justify its current share price. The big question is whether or not it’s going to be able to do it.
Are growth stocks in trouble?
None of this means that Nvidia shares – or growth stocks in general – are overvalued, or that they’re set to fall. And there’s a lot for investors to be optimistic about.
The company’s customers have extremely deep pockets. Whether it’s big tech firms or even nation states, I don’t think there’s much chance of demand dropping off due to pressure on budgets.
The big question, in my view, is whether or not the business can hold onto its competitive position. This is crucial to maintaining its high margins and increasing its profits.
The likes of Microsoft and Meta Platforms will know that Nvidia has a 54% operating margin. And I wouldn’t be surprised to see them investing in their own chip development to try and compete.
Investment returns
The higher bond yields go, the more businesses need to make to justify their current share prices. But growth stocks in general have been resilient over the last month or so.
This indicates that investors are optimistic about corporate earnings. In short, they still think companies will return more cash than bonds will.
The post Here’s what a falling bond market means for growth stocks appeared first on The Motley Fool UK.
Should you invest £1,000 in Nvidia right now?
When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Nvidia made the list?
See the 6 stocks
More reading
Forget Nvidia shares! I’m considering buying this FTSE 250 tech star instead
Is it madness to buy Nvidia stock now?
I’d aim for a million by putting £900 a month into just a few shares!
3 competitors Fool believe will outperform Tesla stock over the next 5 years
If I wanted to invest in Nvidia, I’d buy this FTSE 250 stock at a 12% discount
Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended Meta Platforms, Microsoft, and Nvidia. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.