Re-Rating the Stock Market

You may have heard the term “re-rating” being thrown around about stocks lately. But what does it mean?

In simple terms, a “re-rating” is when investors change how they value a company or industry. This may mean that stocks trade for higher or lower multiples than they previously did, or it may mean investors value companies based on earnings rather than growth.

In other instances (like software today), an entire industry may go through a change in expectations. In a few weeks, we’ve gone from expecting exponential growth for the foreseeable future to expecting little growth and potentially very little terminal value (the present value of long-term cash flows 5+ years in the future).

The first month and a half of 2026 has been a violent re-rating of huge parts of the market, and it may not make sense long-term. More on that in a moment.

The stock market is still holding up well, despite the re-rating lower of some stocks because there’s been a re-rating higher of other stocks. I’ll get to some of the specifics in a moment.

The Asymmetric Portfolio hasn’t done well recently, and some of the big winners of 2025 have unwound a lot of their gains in just a few weeks.

While the drop in shares has been painful, I’m comforted by the fact that earnings have been largely positive. And in less than two weeks, I’ll be happy to buy stocks at what I think are very reasonable valuations.

2026 has been a strange mix of cratering stocks and rising fortunes for semiconductor equipment and consumer staples. The jump in memory and semiconductor stocks (shown in the left middle of the S&P 500 heat map) isn’t surprising given the massive capex plans announced by Big Tech.

What’s shocking is seeing Walmart $WMT ( ▼ 0.79% ), Caterpillar $CAT ( ▼ 0.21% ), ExxonMobil $XOM ( ▼ 0.13% ), and Colgate-Palmolive $CL ( ▼ 1.47% ) climbing over 20% in the first 45 days of the year.

What’s happening right now is what’s known as a “re-rating” of entire industries, which is why there are clusters of green and red above. Investors are worried that growth expectations for software companies like Salesforce $CRM ( ▲ 3.41% ), Intuit $INTU ( ▲ 6.28% ), and ServiceNow $NOW ( ▲ 1.7% ) need to be lowered, and earnings power 5, 10, and even 20 years from now aren’t as strong as once thought because of artificial intelligence.

Meanwhile, it’s likely Caterpillar, Walmart, ExxonMobil, and Colgate-Palmolive will still be around 20 years from now. And investors are willing to pay a premium for that certainty.

Just look at Caterpillar’s P/E multiple nearly tripling over the past year, despite a growth rate of just 3% since 2018.

Walmart is now trading for 47x earnings, despite revenue growing just 3.9% annually over the past decade.

ExxonMobil has a P/E of 22x, despite falling revenue and earnings.

And Colgate-Palmolive has skyrocketed this year because…toothpaste is stable…?

When I say that our advantage over the market is having a longer time horizon than the market, this is what I’m talking about.

In what world is Walmart worth 47x earnings, Caterpillar worth 41x earnings, or Colgate-Palmolive worth 37x earnings, given how slow they’re growing?

Wouldn’t you rather own Duolingo $DUOL ( ▲ 2.03% ) and its 57.5% growth rate and 14.3x P/E multiple over any of these stocks?

Or On Holding $ONON ( ▼ 0.3% ) and its 50% growth rate, expanding margins, and 52.6x P/E multiple over paying the same price for Walmart?

A basket of growth stocks purchased at a value will have some losers, but the winners could 10x, or more, in a decade. That’s what Asymmetric Investing is all about!

The market’s re-rating has put a higher value on the things we absolutely know for sure. For example, we know with a high level of certainty that people will shop at Walmart, we will need big machines, and people will use toothpaste.

A business with ANY uncertainty or that may possibly in the future be disrupted by AI is being thrown out without asking questions.

Re-ratings are opportunities because the market will be right about some of the risks for software and growth stocks, but will be very wrong about others. And when the re-rating goes the other way, I think most of the Asymmetric Portfolio will benefit from multiple expansion.

Revenue growth and margins trends are improving, for the most part, but multiple compressions from this year’s re-rating have hit the portfolio hard.

But tell me, would you rather own cheap growth stocks or expensive value stocks?

Long-term, growth stocks will win that battle every time.

We just don’t know when the market will realize how misplaced this re-rating has been.