Valuations exceeding 20 times are not sustainable if interest rates remain elevated.
Investors need to be cautious when considering such high valuations, as they could be vulnerable to significant losses if interest rates do not decline. High valuations often indicate that a company's stock price has risen excessively compared to its fundamentals, such as earnings or cash flow.
When interest rates are staying high for quite period of time, the cost of borrowing becomes more expensive, which can make it difficult for companies to maintain their growth rates and profitability, which can lead to a reassessment of valuations and a potential correction in stock prices. Therefore, investors should focus on companies with strong fundamentals and sustainable growth prospects, rather than chasing high valuations that may not be supported by underlying economic conditions.
Moreover, when rates are keeping high, investors tend to be more conservative and focused on risk management. This means that they are less likely to invest in high-risk assets, such as stocks with high valuations, as they prioritize short-term liquidity and stability over longer-term growth potential.
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