What goes up must come down’ is a cliché that is also a corruption of Newton’s third law. It’s also a good reminder that when it seems like the business market has fundamentally changed, we often see only a temporary deviation.
This idiom makes sense when looking at the cycle of technical valuations (up and then down), venture capital (up and then down), and the rate at which new unicorns are minted (also up and then down). These three trends are of course interrelated, but what made us pause recently was the realization that we haven’t just seen declines in recent quarters: instead, there has been a full return to pre-COVID standards.
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Take technical valuations, for example: we noticed this morning while drafting the weekly kick-off Equity episode that the value of technology stocks – measured by our favorite software company tracking index – is trading today around the value it had at the beginning of 2020, just before and after the massive COVID-induced sell-off that hit US stocks:
Excuse our annotation method – it’s Monday.
Clearly, the software valuation boom in 2020-2021 was more of an anomaly than a new norm. In addition, the fact that the companies in the index have grown in recent years but are worth less today means that they may have been overvalued even before the corona crisis. If today’s prices hold up, they will denounce not only the excesses of the recent past, but also the overvaluations of the 2010s.