Want proof the 2023 stock-market rally is speculative froth? Look at bitcoin, says investment firm.

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Think the early 2023 stock-market rally is built on a solid fundamental foundation? Bitcoin’s gains say otherwise, argued analysts at Richard Bernstein Advisors, in a Monday note.

“Some have argued that the year-to-date rally in more speculative issues is a fundamental shift from value to growth. The near-50% year-to-date rally in bitcoin and other cryptocurrencies leads us to strongly doubt that is the case,” they wrote.

The S&P 500 index
SPX,
+0.11%
was slightly lower Tuesday morning, on track to book a February loss of more than 2%. It remains up 3.7% for the year to date, while the Dow Jones Industrial Average
DJIA,
-0.39%
has declined 1.2%. The tech- and growth-heavy Nasdaq Composite
COMP,
+0.29%
has set back 0.9% in February, but remains up 9.7% for the year to date.

Growth stocks — shares of companies expected to boost revenue and earnings at a faster pace than their peers, but whose valuations are often based on expected earnings far into the future — led the 2022 stock market rout as Treasury yields jumped. Higher Treasury yields mean the present value of those future earnings is more heavily discounted, which can be particularly painful for shares of companies that aren’t yet profitable.

In the note, the analysts dismissed the idea that there’s a fundamental reason for investors to bid up growth stocks and pointed to the crypto rally as a proxy for what they see as what’s likely to be a short-lived bout of speculative activity. Bitcoin
BTCUSD,
+0.49%
has rallied more than 40% in the year to date, shrugging off a regulatory crackdown on the crypto industry by U.S. regulators in the wake of a series of high-profile meltdowns and scandals, including the collapse of Sam Bankman-Fried’s FTX crypto exchange.

“Cryptocurrencies seem a bellwether of speculation. There is absolutely nothing fundamentally based about cryptocurrencies’ performance,” they wrote. “Cryptocurrencies appreciate solely on the notion that other speculators will buy them in the future at higher prices.”

The crypto rally, which has come alongside revived interest in so-called meme stocks and profitless companies “suggests speculation rather than true economic or profit fundamentals have been driving performance,” the analysts wrote.

Meanwhile, liquidity is being withdrawn by the Federal Reserve and other major central banks at a pace that surpasses the withdrawal around the 2000 dot-com bubble burst or the 2008 housing collapse, they said, arguing that the run-up by pandemic-era highfliers was fueled in large part by the emergency surge in liquidity.

The analysts said the move back toward former winners reflected a tendency by investors to “cling to the old leadership hoping for a return to form.” In reality, when a new bull market comes into being, leadership shifts to stocks that are better suited to the new environment.

“The speculative rally so far this year seems a perfect example of investors’ denial of a changing economy,” they wrote.

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