There's a good reason some stocks are down big in 2026

Why have SaaS and growth stocks taken it on the chin in 2026 while boring businesses like Walmart and Coca-Cola rise?

It’s all about math.

I’m not going to make you do math today, but I do want to show why the math behind analyst models is driving the market to strange places so far this year.

Terminal Value Explained

In Re-Rating the Stock Market, I wrote about how changing expectations for future free cash flow can cause investors to value stocks differently.

What that article missed was the tangible calculations behind how investors think about valuing companies…at least on an academic level.

In theory, stocks are valued based on the present value of all future free cash flows.

That’s an easy statement to make, but it’s fraught with assumptions that I generally think are BS because we can’t predict the future with the certainty of a spreadsheet.

That said, it’s worth going over why investors are selling some stocks and not others.

Let’s use a simple company as an example:

• 2026 FCF: $100

• 2026-2030 Growth Rate: 10% or 20%

• 2031 and Beyond (terminal) Growth Rate: 0% or 5%

• Weighted Average Cost of Capital: 10% or 15%

In this relatively simple model and I’ve shown a chart of the cash flows and terminal value below.

The value of a company generating $100 in free cash flow in 2026 and growing in scenarios above ranges from $944 to $3,303, depending on what you assume for the near-term growth rate, the terminal growth rate, and the weighted average cost of capital.

What I want you to notice in the second chart of each scenario is how much of the value comes from the terminal value, or the value in 2031 and beyond.

No matter how you run a financial model, the terminal value assumptions (growth rate and discount rate) are going to drive the valuation of the business.

If we assume a strong long-term growth rate, it increases the value of the company.

Assume a low or negative growth rate, and the value drops quickly.

It doesn’t take a big change in the valuation assumptions for the value of a company to drop by 75% or more.

This is why software stocks, in particular, are going through such a rough patch. Investors wonder not only what next year will look like, but also what results 5 or 10 years from now will look like.

If growth goes from exponential to linear, values drop quickly.

If there’s a risk of disruption, terminal value could be zero…

Make the wrong terminal value assumption, and you make a terrible investment.

And increased uncertainty means a higher cost of capital, which is the other big driver of the valuation calculation.

The good news for us is, lower growth assumptions and higher discount rates (WACC) mean greater upside for companies that do perform well. It’ll take time for the winners to emerge, but now will be a great time to accumulate growth companies that prove their value long-term.

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