Disruptors Making a Difference

Where Disruptors Will Make a Difference in 2022

ClearBridge Investments believe the most promising areas for growth through innovation will include software and service providers as well as platform companies outside technology.

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After a multiyear run for the valuations of the market’s fastest-growing companies, the prospects of higher interest rates at the end of 2021 sent a shock wave across this cohort of the equity market. While highly profitable mega cap growth stocks continued to thrive late in the year, growth companies down the capitalization spectrum experienced challenging performance. These smaller, rapidly growing companies tend to be less profitable, and their valuations are supported by future years’ earnings. As language from the Fed pivoted from an accommodating to a tightening stance, equity values for companies that depend on discounting future years’ cash flows came under substantial pressure.

A rise in valuations for disruptive growth stocks the last few years embedded heightened expectations for the underlying businesses, which many of those businesses were unable to live up to in the second half of the year. While it was particularly apparent in the performance of many businesses that benefited from the pandemic (e.g. video conferencing, at-home exercise equipment, e-commerce), the drawdowns in valuations within this group were most intense for those that missed consensus forecasts and provided disappointing forward guidance.

Read the full article here: Where Disruptors Will Make a Difference in 2022