by Denise Chisholm, Director of Quantitative Market Strategy, Fidelity Investments
The recent buzz around a certain AI company is another reminder of how technological advancements shape markets. While I’m not tech expert (I can barely use Zoom), history suggests that innovations that drive cost efficiency tend to be net positives for the market and the overall economy. Of course, individual winners and losers emerge, but often what matters most for investors is context – especially valuation starting points. Take growth stocks in the S&P 500. While technology stocks as a sector may still screen expensive, the highest growth companies in the index are nowhere near the valuation extremes of the dot-com era.
More importantly, they now sit in the cheapest third of their historical valuation distribution. That’s significant – historically, when growth stocks are expensive, growth has tended to underperform value. But when they are cheap – like now – they have tended to outperform. So, while individual tech names may be volatile amid the latest headlines, the broader setup for large cap growth stocks should have more valuation support than you might think.
Contrast this with small caps. The further down the cap spectrum you go, the less valuation support growth stocks have. In the S&P 600, growth stocks are actually expensive.
While historical data suggests that overvaluation in small-cap growth doesn’t necessarily lead to sharp underperformance, the risk-reward shifts noticeably. This dynamic stands in stark contrast to the large-cap space, where growth stocks are priced more favorably. The bottom line? Large cap growth stocks look to be better positioned than many might assume, supported by strong fundamentals and more reasonable valuations. Meanwhile, value investors may find more compelling opportunities in the small-cap space, where valuation discrepancies create potential opportunities. As always, where you start matters more than the latest headline.
This information is provided for educational purposes only and is not a recommendation or an offer or solicitation to buy or sell any security or for any investment advisory service. The views expressed are as of the date indicated, based on the information available at that time, and may change based on market or other conditions. Opinions discussed are those of the individual contributor, are subject to change, and do not necessarily represent the views of Fidelity. Fidelity does not assume any duty to update any of the information.
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