When a tech sector is sold off because of a narrative threat ("AI will replace X") rather than because of actual fundamental deterioration, the compression tends to be indiscriminate. Adapters and genuinely disrupted businesses get compressed to similar multiples, creating systematic mispricings in favour of companies already integrating the threat. This differs from 2022's rate-driven compression, where multiple contraction was proportional to duration risk; in a narrative-driven selloff, the market is not pricing companies — it is pricing a story.
The analytical signal: when sector EV/S or P/S multiples compress across the board, diagnose the mechanism. If the compression is narrative (fear of displacement), separately evaluate (a) companies actively building on the disruptive technology, (b) companies with moats that make disruption slower than feared, and (c) companies genuinely at structural risk. Group (a) and (b) are frequently mispriced at the same multiples as group (c).
In future portfolio and sector analyses: when EV/S compression across a cohort is broad-based, run the mechanism test before attributing it to fundamentals. Narrative-driven compression resolves when a single high-profile company in the cohort demonstrates the disruption thesis is slower than feared — that event re-rates the entire cohort. Weight the opportunity in adapters over the threatened, not in the sector average.