What happened
Shares of fintech leaders Block (SQ -2.76%), StoneCo (STNE -1.58%), and Lemonade (LMND -1.09%) fell hard on Thursday, down 6.3%, 5.5%, and 6%, respectively, as of 2:15 p.m. ET today.
There wasn't much in the way of news coming from any of these companies today, although StoneCo was downgraded by a Wall Street analyst last night. The downward move by these three companies, as well as other high-growth stocks today, points to a general decline in growth stocks due to an upward move in long-term bond yields.
So what
Late on Wednesday, StoneCo saw its price target slashed by Goldman Sachs analysts, from $19 to $12, while maintaining a neutral rating on the stock. That compares with the stock falling below $10 today.
However, more likely weighing on these three fintech stocks was a rapid rise in long-term bond yields, with the 10-year Treasury bond yield jumping from 2.84% to 2.94%, a fairly big jump for a single day.
A rapid upward move in long-term bond yields inevitably leads to fears of further increases. Since many investors use the 10-year yield as a baseline to discount future earnings, a rise in long-term yields will depress the value of future earnings. Therefore, growth stocks such as these three will be overly discounted.
Federal Reserve Chairman Jay Powell also said at a conference today that the he would favor front-loading interest rate hikes amid soaring inflation, putting investors in even more of a sour mood.
Block currently trades at over 100 times this year's earnings estimates, and Lemonade is generating losses that are expected to continue this year. While StoneCo trades at a lower 28 times this year's earnings estimates, it has the added problems of its home economy of Brazil, which is currently experiencing the dual threats of high inflation and low growth.
Fintech stocks are being especially hurt as well, as some think central banks may go too far and push the economy into a recession. That would also hurt financially-related firms such as these three. So high-growth fintechs are getting it on two sides in this environment: hurt on valuation from rising rates, as well as pessimism over a potential economic downturn next year.
Image source: Getty Images.
Now what
Expect more volatility in growth names. The Federal Reserve seems likely to hike interest rates by a large amount at its next meeting, probably 50 basis points and even potentially 75 basis points at either the May or June meeting. Combined with the runoff of the Fed's balance sheet, the environment could remain volatile for a while.
Here at The Motley Fool, we look to buy excellent companies with favorable long-term prospects, and we don't attempt to anticipate short-term moves regarding inflation or the Federal Reserve. Therefore, investors in these names should try to look through the day-to-day noise and focus on these companies' long-term trajectory. That being said, investors should also make sure they are paying a reasonable price for that growth.
While business cycles will come and go, strong companies with competitive advantages, great cultures, and good capital allocation will thrive over the long term. Amid this market's volatility, just make sure that your portfolio companies still have these characteristics. If not, it could be time to upgrade to companies that do.
