Key points
- Right now, in February 2026, there’s a lot of dispersion in the market
- Money has rotated out of growth sectors and into value stocks.
- But that’s left value stocks over-bought, with stretched valuation metrics.
- Meanwhile growth stocks seem over-sold, with valuation metrics at historical lows.
- We don’t think the market can sustain this contradiction for long.
Perhaps The Bubble Isn’t Where We Think It Is?
In a healthy market, stocks tend to move together, either expanding upwards or compressing downwards but broadly tracking in the same direction.
But right now the market has a number of stocks showing extreme strength, and simultaneously a number of other stocks showing extreme weakness, all while the indexes barely move. Too many stocks are behaving as if conditions are exceptional, but in opposite directions. Market participants call this setup “dispersion”, and it’s pretty extreme at the moment.
Some investors are talking about this being a healthy rotation of market leadership – from growth sectors, such as tech, to value sectors, such as consumer staples and energy – but there’s more going on than just that. The movement out of growth stocks looks like a “baby with the bathwater” panic rather than a calm rational measured move. And the valuations of the “value” stocks have now been pushed up to bubble-ish levels that bely the term value.
Lighthouse Funds has a strong growth focus, so some might argue we would say that. But we’ve not seen this level of dispersion for at least 20 years and it’s hard to understand a sensible rationale for it now.
Here’s some examples of the bubble in defensive value stocks …
- Costco is +18% YTD, with a forward P/E of 50x, and 11% pa EPS growth
- WalMart is +18 YTD, with a forward P/E of 50x, and 7% pa EPS growth
- Caterpillar is +35% YTD, with a forward P/E of 34x, and 1% pa EPS growth
- Chevron is +20% YTD, with a forward P/E of 27x, and -25% pa EPS growth
- Coca-Cola is +13% YTD, with a forward P/E of 24x, and 5% pa EPS growth
- Proctor & Gamble is +12% YTD, with a forward P/E of 23x, and 0% pa EPS growth
The average of those defensive value stocks is +20% YTD, with a fwd P/E of 35x and 0% pa EPS growth.
Now here’s some examples of the recent fall in growth stocks, from our Global Equity Fund …
- Nvidia is -2% YTD, with a forward P/E of 39x, and 60% pa EPS growth
- Celestica îs -5% YTD, with a forward P/E of 31x, and 70% pa EPS growth
- Mastercard is -9% YTD, with a forward P/E of 27x, and 25% pa EPS growth
- AppLovin is -42% YTD, with a forward P/E of 25x, and 87% pa EPS growth
- Microsoft is -17% YTD, with a forward P/E of 24x, and 28% pa EPS growth
The average of those growth stocks is -25% YTD, with a fwd P/E of 29x and 54% pa EPS growth.
One of our favourite metrics is the PEG ratio, which is the P/E ratio divided by the EPS growth rate. It’s basically a measure of how cheap or expensive a company’s growth is. Without wanting to get too technical about the corporate finance, growth stocks tend to have higher P/E ratios, but that’s offset by their strong earnings growth.
We tend to get uncomfortable with a PEG ratio of more than 3. And a PEG ratio of less than 1 is heroic. So look back at the numbers above. The “value” stocks have PEG ratios of 5 or higher. The growth stocks have PEG ratios of less than 1. That says to us that right now the bubble isn’t in growth stocks. Growth is cheap. It’s value stocks that are the expensive crowded trade.
The strongest driver of future share price growth is EPS growth. Across a broad market such as the S&P500 the average is about 10% pa EPS growth. For a stock to deliver “alpha” (above-market returns) then you basically need EPS growth that is materially higher than this 10-ish % pa average. Value stocks don’t tend to have that. That doesn’t mean they crash – they are defensive investments – but they tend to stagnate for long periods between brief bursts upwards.
We don’t think the market can sustain this internal contradiction for long, so the question is just how long it can last. At their current P/E ratios value stocks seem overbought, and growth certainly seems oversold. We expect that at some point soon there will be “bubble exhaustion” in defensive value stocks, and “crash exhaustion” in growth and interest rate‑sensitive stocks.