Valuation gaps: Growth stock rally leaves more room for disappointment

As Netflix Inc. shareholders found out to their dismay this week, lofty global growth stock valuations can come back to bite, when a company’s outlook isn’t bullish enough to back them up.

Since 2002, the MSCI AC World Growth Index has about doubled the return of its value counterpart, yet its relative earnings expectations have failed to grow at a similar pace. That means a significant valuation gap has emerged between the two types of stocks, one that isn’t necessarily justified by higher relative earnings growth.

That leaves growth stocks vulnerable to a sharp valuation correction should investors become disappointed. Netflix fell