The stock market corrected from all time highs recently, after inflation worries seem to have spooked markets.
Inflation and stock valuation
For one, the US 12-month core inflation rate jumped to 3%, the highest since 1995.
US Core Inflation Rates
Many high growth stocks and ETFs like Cathie Wood’s Innovation ETF ARKK fell more than 33% since its peak in March, and has not shown any signs of reversing.
1-year price chart for ARKK
The reason for such drastic price correction can be attributed to how growth stocks are priced.
Since many growth stocks do not exhibit profitability and have little to no cash flows today, and many of these cash flows are expected earnings in the future, when valuing growth stocks using the discounted cash flow model, the expectations – and valuation – of growth stocks tend to take a much larger fall compared to their value counterparts when interest rates rise.