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3 Stocks to Rally if the Fed is Done Raising Rates
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This week, the market eagerly anticipates a series of crucial data points that will shed light on the economic landscape. Among these indicators are multiple inflation readings, the Fed’s rate policy decision, and employment data. These metrics are critical in determining the current state of the economy and may guide investor decisions through the remainder of the year.
Fed Policy
Namely, the direction of interest rates are absolutely key in deciding which stocks will rally and which will fade. Currently, traders are anticipating the first pause in interest rate hikes in more than a year, signaling what may be the end of this hiking cycle.
The federal funds futures market is pricing in a 74% chance of the FOMC holding rates where they are, however, the July meeting is still up in the air, with a 52% chance that the central bank raises rates again. The Fed has remained steadfast in its position that they are data dependent, so a hot inflation number, or very weak economic data could still alter the path, although it seems less and less likely as data comes out.
Image Source: CME Group
Growth vs. Value
For now, it looks like Jerome Powell and the Fed may have successfully engineered a soft landing. If that is the case, investors can expect rates to move lower, which should be conducive to the stock market. More specifically, if rates have peaked investors are going to favor growth and technology stocks over value, which would be a continuation of what we have seen so far this year.
Image Source: Zacks Investment Research
Bears Getting Burned
While some investors would consider it preposterous to jump into stocks that have already run up so much this year, that may be exactly why they continue. With some investors going so far as shorting stocks like Nvidia (NVDA - Free Report) , which have benefitted from the AI hype and dovish Fed policy, I think they are likely to get burned.
Often, following a bear market like we had last year, investors become tethered to their bearish inclinations. But the markets almost always climb that wall of worry, and that is exactly what is happening this year.
The stocks that will do well through the next quarter or two are likely the ones that are already doing well. Here I will focus on Nvidia, Meta Platforms (META - Free Report) , and Palo Alto Networks (PANW - Free Report) which all have top Zacks ranks, and tremendous momentum behind them.
Image Source: Zacks Investment Research
Nvidia
By now, we all know that Nvidia has been the stock to own this year, thanks to its market leading processors, which will be a critical piece of AI infrastructure.
While some investors may scoff at the idea of buying a stock that is already up 170% YTD, momentum often begets momentum, and NVDA has a clean technical trade setup worth considering.
In the chart below we can see a tight bull flag has developed in the price action. If Nvidia stock can break out above the $396 level, it may very well blast higher again. Alternatively, if the stock can’t hold above $374, the setup is invalid, and investors may want to wait for another opportunity.
Image Source: TradingView
Nvidia has also experienced massive earnings revisions, giving it a Zacks Rank #1 (Strong Buy). Current quarter earnings estimates have nearly doubled and are expected to climb 300% YoY. FY23 earnings have been upgraded by 70% and are expected to grow 129% YoY.
With the huge computing power required to wrangle, analyze, and process the data involved in AI projects, all power users of the technology will be required to upgrade their systems. This will be a boon to NVDA’s business for years to come.
Image Source: Zacks Investment Research
Meta Platforms
Meta Platforms, another market leader, looks set to benefit from lower rates, strong earnings expectations, and momentum.
META also has a constructive technical setup. The stock continues to consolidate and breakout from continuation momentum patterns, giving traders favorable risk-reward setups. Although it may take a few more days to build out, the current bull flag looks promising.
Above the $273 level and the stock looks ready to run again. However, if the price can’t hold above the $259 level it may be worth waiting for another setup.
Image Source: TradingView
Meta Platforms boasts a Zacks Rank #1 (Strong Buy) and has been on that list for three months now. META continues to receive near unanimous upgrades from analysts, and even with these higher estimates the company is beating expectations. Last quarterly report META beat estimates by 35%.
Current quarter earnings estimates have been revised higher by 16% over the last two months and are projected to grow 15% YoY, while FY23 earnings have been upgraded by 14%, and are expected to climb 21% YoY.
Image Source: Zacks Investment Research
Palo Alto Networks
Palo Alto Networks continues to grow at breakneck speeds, with adoption of its security platforms accelerating thanks to remote work trends. Earnings are expected to grow by over 30% annually over the next 3-5 years, while sales are projected to grow 21% annually through 2025.
PANW too has a compelling technical chart setup. After pushing its all-time highs a few weeks ago, the price is holding up well. Additionally, after filling a gap from last week, the chart is forming a bull flag continuation setup.
If PANW can trade above the $224 level, it should initiate another leg higher. But, if it begins to fade, and trades below the $218 level, it may be worth stepping aside for more favorable conditions.
Image Source: TradingView
There is no dancing around the fact the PANW trades at a very rich valuation. At 9.8x one-year forward sales, it is well above the market average of 3.7x, and above its 10-year median of 8x. But, when interest rates are trending lower investor pile into high growth stocks, and that is exactly what we are seeing this year.
Image Source: Zacks Investment Research
Bottom Line
The market clearly favors these momentum stocks, and with lower interest rates likely on the horizon the stocks listed above are worthy considerations. Nevertheless, investors must remain open minded, with ‘strong opinions, loosely held.’
A surprise in any of the major economic indicators could completely change the trajectory of the market, which is why I focus on low risk, high reward trade setups. As always, investors should keep risk management, and capital preservation top of mind.
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3 Stocks to Rally if the Fed is Done Raising Rates
This week, the market eagerly anticipates a series of crucial data points that will shed light on the economic landscape. Among these indicators are multiple inflation readings, the Fed’s rate policy decision, and employment data. These metrics are critical in determining the current state of the economy and may guide investor decisions through the remainder of the year.
Fed Policy
Namely, the direction of interest rates are absolutely key in deciding which stocks will rally and which will fade. Currently, traders are anticipating the first pause in interest rate hikes in more than a year, signaling what may be the end of this hiking cycle.
The federal funds futures market is pricing in a 74% chance of the FOMC holding rates where they are, however, the July meeting is still up in the air, with a 52% chance that the central bank raises rates again. The Fed has remained steadfast in its position that they are data dependent, so a hot inflation number, or very weak economic data could still alter the path, although it seems less and less likely as data comes out.
Image Source: CME Group
Growth vs. Value
For now, it looks like Jerome Powell and the Fed may have successfully engineered a soft landing. If that is the case, investors can expect rates to move lower, which should be conducive to the stock market. More specifically, if rates have peaked investors are going to favor growth and technology stocks over value, which would be a continuation of what we have seen so far this year.
Image Source: Zacks Investment Research
Bears Getting Burned
While some investors would consider it preposterous to jump into stocks that have already run up so much this year, that may be exactly why they continue. With some investors going so far as shorting stocks like Nvidia (NVDA - Free Report) , which have benefitted from the AI hype and dovish Fed policy, I think they are likely to get burned.
Often, following a bear market like we had last year, investors become tethered to their bearish inclinations. But the markets almost always climb that wall of worry, and that is exactly what is happening this year.
The stocks that will do well through the next quarter or two are likely the ones that are already doing well. Here I will focus on Nvidia, Meta Platforms (META - Free Report) , and Palo Alto Networks (PANW - Free Report) which all have top Zacks ranks, and tremendous momentum behind them.
Image Source: Zacks Investment Research
Nvidia
By now, we all know that Nvidia has been the stock to own this year, thanks to its market leading processors, which will be a critical piece of AI infrastructure.
While some investors may scoff at the idea of buying a stock that is already up 170% YTD, momentum often begets momentum, and NVDA has a clean technical trade setup worth considering.
In the chart below we can see a tight bull flag has developed in the price action. If Nvidia stock can break out above the $396 level, it may very well blast higher again. Alternatively, if the stock can’t hold above $374, the setup is invalid, and investors may want to wait for another opportunity.
Image Source: TradingView
Nvidia has also experienced massive earnings revisions, giving it a Zacks Rank #1 (Strong Buy). Current quarter earnings estimates have nearly doubled and are expected to climb 300% YoY. FY23 earnings have been upgraded by 70% and are expected to grow 129% YoY.
With the huge computing power required to wrangle, analyze, and process the data involved in AI projects, all power users of the technology will be required to upgrade their systems. This will be a boon to NVDA’s business for years to come.
Image Source: Zacks Investment Research
Meta Platforms
Meta Platforms, another market leader, looks set to benefit from lower rates, strong earnings expectations, and momentum.
META also has a constructive technical setup. The stock continues to consolidate and breakout from continuation momentum patterns, giving traders favorable risk-reward setups. Although it may take a few more days to build out, the current bull flag looks promising.
Above the $273 level and the stock looks ready to run again. However, if the price can’t hold above the $259 level it may be worth waiting for another setup.
Image Source: TradingView
Meta Platforms boasts a Zacks Rank #1 (Strong Buy) and has been on that list for three months now. META continues to receive near unanimous upgrades from analysts, and even with these higher estimates the company is beating expectations. Last quarterly report META beat estimates by 35%.
Current quarter earnings estimates have been revised higher by 16% over the last two months and are projected to grow 15% YoY, while FY23 earnings have been upgraded by 14%, and are expected to climb 21% YoY.
Image Source: Zacks Investment Research
Palo Alto Networks
Palo Alto Networks continues to grow at breakneck speeds, with adoption of its security platforms accelerating thanks to remote work trends. Earnings are expected to grow by over 30% annually over the next 3-5 years, while sales are projected to grow 21% annually through 2025.
PANW too has a compelling technical chart setup. After pushing its all-time highs a few weeks ago, the price is holding up well. Additionally, after filling a gap from last week, the chart is forming a bull flag continuation setup.
If PANW can trade above the $224 level, it should initiate another leg higher. But, if it begins to fade, and trades below the $218 level, it may be worth stepping aside for more favorable conditions.
Image Source: TradingView
There is no dancing around the fact the PANW trades at a very rich valuation. At 9.8x one-year forward sales, it is well above the market average of 3.7x, and above its 10-year median of 8x. But, when interest rates are trending lower investor pile into high growth stocks, and that is exactly what we are seeing this year.
Image Source: Zacks Investment Research
Bottom Line
The market clearly favors these momentum stocks, and with lower interest rates likely on the horizon the stocks listed above are worthy considerations. Nevertheless, investors must remain open minded, with ‘strong opinions, loosely held.’
A surprise in any of the major economic indicators could completely change the trajectory of the market, which is why I focus on low risk, high reward trade setups. As always, investors should keep risk management, and capital preservation top of mind.