Is an unknown X-Factor driving stock market returns? Speculative growth stocks, in particular, appear to be seriously dislocated from fundamentals. In this Q&A, we test for the presence of a fundamental X-factor that could support such extreme growth pricing.
Our analysis shows that the median growth rate for expensive stocks is 25%. This means that median stocks would need to grow their earnings at 25% for 10 full years in order to justify their current valuations. It is much more likely that prices are being driven by investor sentiment. Such a dislocation between prices and fundamentals can set non-price conscious investors up for dramatic losses in the event of a sentiment crash. But it can increase the return potential for value investors.