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> This is why growth stocks like tech have taken more of a beating than value stocks like food, oil, or defense. The former rely heavily on the expectation of f

> This is why growth stocks like tech have taken more of a beating than value stocks like food, oil, or defense. The former rely heavily on the expectation of future cash flows, often far off in the future, and if there's an incidence of extremely high interest rates between now and then, the value of those cash flows is significantly reduced even if their absolute amount increases because of inflation. I thought that the value of many tech stocks was heavily based on growth. E.g. it's not worth waiting 10 or 20 years for a tech stock to start paying 3% dividends if the price stays the same; start earning 3% or more right now instead. In that sense, selling stock due to the risk of inflation is betting both that the company won't grow as fast inflation-adjusted as it did in the past (essentially the company can't perform as well under inflation) and that inflation will still be high when the stock starts paying dividends. I am definitely not a financial analyst, just confused.

nostrademons 5y ago
That's true but misses an important factor: competition from other assets. The cash flow stream from most tech companies usually looks like 5 years of large cash infusions (often from VCs); a decade or two of zero cash spun off as the company reinvests all profits in growth; and then a few years to a decade of massive cash being spun off for investors. For a historical example, see Apple - didn't pay a dividend for about 15 years from Steve Jobs's return until 2012, and now regularly returns tens of billions to investors in buybacks. For a current example, see Salesforce, which makes effectively zero GAAP profit but is growing massively as they reinvest that into product development and sales. If competing investments - say Treasuries - are yielding zero now, there's no reason why you wouldn't buy Salesforce stock now and lock in those future dividends even though they're 15 years off. But if the 10-year Treasury is going to go up to 15% in 2 years - why wouldn't you sell your Salesforce stock when rates go up, buy a 10-year Treasury, quadruple your money over those 10 years, then buy 4x as much Salesforce stock right before they actually start spinning off cash as a dividend? The 1970s actually looked like this. There was a big stock run-up in the late 60s, and then a very large stock market crash (~50%) in 1973 when the Fed started raising interest rates to combat inflation. Stocks continued to trade sideways during the high-inflation, high-interest period of the 1970s, and then they really took off in the late 80s once inflation was under control and rates started dropping.

nostrademons 5y ago

That's true but misses an important factor: competition from other assets. The cash flow stream from most tech companies usually looks like 5 years of large cash infusions (often from VCs); a decade or two of zero cash spun off as the company reinvests all profits in growth; and then a few years to a decade of massive cash being spun off for investors. For a historical example, see Apple - didn't pay a dividend for about 15 years from Steve Jobs's return until 2012, and now regularly returns tens of billions to investors in buybacks. For a current example, see Salesforce, which makes effectively zero GAAP profit but is growing massively as they reinvest that into product development and sales. If competing investments - say Treasuries - are yielding zero now, there's no reason why you wouldn't buy Salesforce stock now and lock in those future dividends even though they're 15 years off. But if the 10-year Treasury is going to go up to 15% in 2 years - why wouldn't you sell your Salesforce stock when rates go up, buy a 10-year Treasury, quadruple your money over those 10 years, then buy 4x as much Salesforce stock right before they actually start spinning off cash as a dividend? The 1970s actually looked like this. There was a big stock run-up in the late 60s, and then a very large stock market crash (~50%) in 1973 when the Fed started raising interest rates to combat inflation. Stocks continued to trade sideways during the high-inflation, high-interest period of the 1970s, and then they really took off in the late 80s once inflation was under control and rates started dropping.