Why investors are paying less for growth today
The stock market does not merely reflect earnings. It also reflects expectations. Prices rise and fall not only because profits improve or weaken, but because investors adjust the amount they are willing to pay above intrinsic value.
That difference between price and intrinsic value, or what we call the growth premium, provides a clear window into the prevailing sentiment in the market.
To appreciate what a growth premium means, we must first understand how it is computed.
A stock price can be divided into two components: intrinsic value and growth premium.
Intrinsic value represents the present value of a company’s existing earnings, assuming no future growth. It is calculated by discounting current earnings at a required rate of return.
The growth premium, meanwhile, is the excess of the market price over intrinsic value, which reflects how much investors are willing to pay for anticipated expansion.
For example, Converge generated P1.59 in earnings per share over the past 12 months, based on its trailing 2025 results. If investors require a 12.24 percent return, the intrinsic value of the stock can be estimated by capitalizing those earnings. Dividing P1.59 by 0.1224 gives an intrinsic value of roughly P12.99 per share.
Last January, the stock was trading at about P16.24. The difference between the market price and the intrinsic value was P3.25 per share, which represents the growth premium. Expressed as a percentage of the market price, that premium is about 20 percent, which reflects the portion of the stock price that investors are willing to pay for Converge’s expected future growth beyond its current earnings.
If confidence strengthens and the stock rises to, say, P18.50 while intrinsic value remains unchanged, the premium expands to about 30 percent.
Conversely, if pessimism sets in and the stock declines to P13.50, the premium compresses to just only 4 percent. If fear intensifies further and the price falls below intrinsic value, the premium turns negative, which signifies that investors are no longer paying for growth at all.
This same framework applies to the broader market. During the bull market years from 2014 to 2018, the average market premium hovered around 40 percent. Investors were confident in corporate expansion, infrastructure spending and favorable liquidity conditions. Growth expectations were deeply embedded in stock prices, and valuations reflected that optimism.
The onset of the COVID-19 crisis in 2020 dramatically reversed this sentiment. As uncertainty surged and economic activity stalled, the average premium collapsed and even turned negative at the height of the panic.
Investors demanded a substantial margin of safety, and many stocks traded close to or below their intrinsic value. That negative premium was not just a valuation signal. It was a reflection of widespread fear.
When vaccines were introduced and economic reopening became visible, optimism returned. The premium expanded sharply once again, which climbed back toward 30 to 40 percent levels as the market anticipated a strong earnings recovery. The rapid expansion of the premium during that period reflected a shift from pessimism to renewed confidence.
However, the market began to change in 2022 and 2023. Inflation accelerated globally, central banks raised interest rates and discount rates moved higher. As required returns increased, intrinsic values declined, and investors became more selective in paying for future growth. Even when stock prices stabilized, the premium gradually compressed.
By 2024, despite periodic rebounds in the Philippine Stock Exchange Index (PSEi), the average premium had declined to roughly 20 percent.
This level suggested that while the market was functioning and no longer in crisis, optimism was far more restrained compared with the earlier recovery phase.
Today, the median premium stands at only 4.7 percent. When viewed against this historical backdrop, the current premium signals a significant shift in mood.
A 4.7-percent premium indicates that investors are pricing stocks much closer to intrinsic value and are no longer aggressively paying for anticipated growth.
The contraction reflects heightened sensitivity to geopolitical tensions, rising global uncertainty and a more cautious approach toward earnings expectations.
Importantly, the shrinking premium does not necessarily mean earnings have deteriorated sharply. Rather, it suggests that the willingness to assume risk has diminished.
Social mood plays a critical role in this process. As headlines emphasize war, inflation risks and global instability, investor appetite for growth diminishes and capital preservation becomes more important.
The key question now is whether the premium will shrink further.
History shows that premiums move in cycles. During extreme pessimism, as seen in the COVID-19 panic, premiums can fall toward zero or even turn negative.
Such levels imply that investors are demanding exceptional safety and are unwilling to price in future expansion.
It is not impossible that the premium could compress further if global risks intensify or if uncertainty deepens in the coming weeks. A decline toward zero would signal growing pessimism and a retreat toward intrinsic value as the anchor of valuation.
On the other hand, if geopolitical tensions ease and confidence stabilizes, the current modest premium could provide room for gradual expansion without requiring excessive optimism.
For now, the message is clear. Investors are participating, but they are no longer paying blindly for growth.
Henry Ong is a registered financial planner of RFP Philippines. To learn more about investment planning, attend 115th batch of RFP Program this March 2026. To register, e-mail at info@rfp.ph.
