The only exception was a short period earlier this year when value stocks were in favour due to post-COVID inflation fears.
So have growth shares run too hot for too long now? Are they overly expensive and can only go down from here?
The older folks would certainly remember what happened in the early 2000s when the dot-com bubble exploded. That ended in tears for many people.
Is 2021 the same as when the dot-com bubble burst?
BetaShares chief economist David Bassanese set out to answer this question this week.
He used the NASDAQ-100 Index (NASDAQ: NDX), which includes many of the US technology multinationals, as a proxy for growth shares in his analysis.
“The NASDAQ-100 index has performed very strongly in recent years. Looked at from a return perspective alone, this strong relative performance is akin to that seen during the ‘dotcom bubble’ 20 years ago,” he said on the BetaShares blog.
“This time around, however, this solid performance has been well supported by underlying fundamentals, namely strong relative growth in earnings.”
A quick way of judging how expensive shares are in relation to other periods is to look at the price-to-earnings (PE) ratio.
“At least up until recently, the NASDAQ-100’s price to forward earnings (PE) ratio had moved broadly sideways and averaged just under 20,” said Bassanese.
“Since the COVID crisis, however, prices have increased relative to earnings such that the PE ratio has increased – reaching an end-month peak of 30 at end-August 2020. As at end-July 2021, it was trading at a forward PE ratio of 27.2.”
So is a PE ratio of 27 expensive?
Maybe, but it’s nothing like the dot-com bubble days, when it reached 70 and 80.
“Since the mid-1980s, the PE ratio has averaged around 25 – though excluding the bubble years from 1997 to 2004, the average has been only 21,” Bassanese said.
“So in that regard the PE ratio today is 30% above its long-run average excluding the bubble years.”
But are ASX growth shares too expensive vs value stocks?
Bassanese also pointed out that while growth shares might be above their long-term price average, that still doesn’t mean they’re much more expensive than value stocks.
“PE ratios in many markets are elevated these days – helped by very low interest rates, and to an extent, an expectation of a continued strong rebound in corporate earnings following their slump last year.”
For example, the MSCI All Country World Index is 27% above its long-term average since the mid-1980s, excluding the late 1990s bubble period. That’s comparable to the NASDAQ-100’s 30% premium.
Additionally, Bassanese reckons growth in earnings will deflate the current PE ratio or push up share prices further.
“Current consensus estimates suggest forward earnings for the NASDAQ-100 Index will lift 14% between now and end-2022, which remains a bit more than the 11% growth expectation for global stocks overall,” he said.
“All up, so far at least it’s hard to argue growth stocks – as proxied by the NASDAQ-100 Index – are clearly over-valued, given the current still low level of interest rates and relative to similarly above-average global equity PE valuations more broadly.”