Should You Buy This Growth Stock Down 27% and Hold for the Next 10 Years?

The recent 27% decline in growth stocks has left many investors wondering whether now is the time to buy or to stay on the sidelines. With economic growth surging post-pandemic and interest rates on the rise, the landscape for growth stocks has shifted dramatically. But does this decline present a buying opportunity, or are there deeper issues at play that could affect long-term performance?



To understand the implications of this decline, it's essential to look at the key factors driving it. One of the most significant is the changing economic outlook. Economic growth has surged since the COVID-19 pandemic, and interest rates have risen in response. Higher interest rates mean a higher discount rate, making future earnings worth less than earnings today. This sensitivity to interest rates is a significant risk for growth stocks, which are often valued based on their future earnings potential.

Another critical factor is valuation. Growth stocks have historically high valuations, as measured by price-to-earnings or price-to-book value ratios. As of the last week of January 2025, US growth stocks covered by Morningstar analysts were trading at a 14% premium. This premium had climbed as high as 20% at the end of 2024, while value stocks traded at an 8% discount. Such high valuations can make growth stocks more sensitive to changes in market conditions and investor sentiment.

Market expectations and inflation are also playing a role. Market participants have dramatically pared back their expectations for rate cuts from the Federal Reserve in 2025 due to sticky inflation and an uncertain policy outlook. This shift in expectations has implications for growth stock valuations. Scott Clemons, chief investment strategist at Brown Brothers Harriman, notes, "There’s been about a 125- or 150-basis-point shift upward in expectations for interest rates, all of which I think is explained by shifting inflation expectations."



So, should you buy this growth stock down 27% and hold for the next 10 years? The answer depends on several factors. If interest rates stabilize or decrease, growth stocks could see a rebound. However, if interest rates remain high or continue to rise, growth stocks may face headwinds. Additionally, the current high valuations of growth stocks may need to adjust to more sustainable levels. If growth stocks continue to trade at a premium, they may be more vulnerable to market corrections. However, if valuations normalize, growth stocks could offer better long-term returns.

Economic conditions will also play a crucial role. If the economy continues to grow strongly, growth stocks may benefit. However, if the economy enters a recession or experiences a slowdown, growth stocks could underperform. Investor sentiment and market expectations will also be key considerations. If investors regain confidence in growth stocks, they could see a resurgence. Conversely, if investor sentiment remains cautious, growth stocks may continue to struggle.

In summary, the 27% decline in growth stocks presents a complex picture. While there are risks associated with higher interest rates, valuation concerns, and shifting market expectations, there are also opportunities for long-term gains. Investors should carefully consider these factors and their own risk tolerance before making a decision.