Growth Stock Valuations in Perspective
While higher valuations for growth stocks relative to the broader market cause some investors anxiety, historical data suggests current valuations may produce solid long-term annualized returns. For example, as of the end of August the price-earnings ratio of the Russell 1000 Growth Index indicates a potential 10-year annualized return that we believe is attractive relative to our view of prospective fixed income returns, based on the historical relationship between valuation and long-term returns.
  • R-squared, or the “coefficient of determination,” denotes how much of the movement of one variable is attributable to another. In this case, nearly 80% of the Russell 1000 Growth Index’s 10-year returns can be explained by the starting price-earnings ratio (P/E).  

  • Growth stock valuations are higher than those of the broad market as measured by the S&P 500 Index. There is good reason. Growth stocks have higher returns on capital, faster growth, and less debt (see p. 23 of the Summer 2018 Capital Markets Presentation). 

  • The higher absolute valuations of growth stocks can cause investors apprehension. Historically speaking, however, the current 21x P/E of the Russell 1000 Growth Index (as of 08/31/18) has been correlated with an attractive annualized 10-year return of approximately 7% shown in the above regression.


The views expressed are the views of Fred Alger Management, Inc. as of September 2018. These views are subject to change at any time and they do not guarantee the future performance of the markets, any security or any funds managed by Fred Alger Management, Inc. These views are not meant to provide investment advice and should not be considered a recommendation to purchase or sell securities.

This material must be accompanied by the most recent fund fact sheet(s) if used in connection with the sale of mutual fund shares. 

Risk Disclosure: 
Investing in the stock market involves gains and losses and may not be suitable for all investors. Investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Many technology companies have limited operating histories and prices of these companies' securities have historically been more volatile than other securities, especially over the short term. Technology companies may also face increased competition, government regulation, and risk of obsolescence due to progress in technological developments. 

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