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Why Shares of Square Are Volatile Today

By Bram Berkowitz – Nov 23, 2021 at 3:20PM

Key Points

  • Signs of higher inflation, the Federal Reserve tapering its bond purchases, and the higher likelihood of rate hikes in 2022 have led to investors souring on growth stocks in recent weeks.

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The macro environment has gotten quite tough for growth stocks in recent weeks.

What happened

Shares of Square (SQ -2.46%) were volatile Tuesday, trading nearly 3% down earlier today before recovering most of those losses. The stock is down more than 12% over the last week. There was no obvious reason behind the move, although all growth tech stocks, fintech in particular, seem to be struggling in the current macro environment.

So what

The environment for growth stocks has gotten much more difficult. The large growth seen in the consumer price index in October has prompted more fears that inflation may not be as transitory as the Federal Reserve thinks. The Fed has also started to taper its bond-buying program, and the potential for rate hikes in 2022 has gotten a lot more real.

Person's hand drawing a red squiggly line downward.

Image source: Getty Images.

When short- and long-term rates rise, it puts more pressure on these fast-growing tech stocks like Square because the value of their future cash flows goes down, debt becomes more expensive, and earnings expectations shrink.

With Square trading north of 200 times earnings for most of this year, investors may be getting spooked about how strong the valuation has run up.

Now what

The good news is nothing has fundamentally changed in Square's business model and the consensus price target for the stock is still $302, so analysts are still quite bullish on the company. There could be some volatility in the near term, but the long-term prospects for Square are still quite good.

Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Square. The Motley Fool has a disclosure policy.

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