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Wall Street market participants have suddenly turned optimistic on interest rate cuts by the Fed following the recently released soft economic readings. The CME FedWatch tool currently shows a 78% probability of a Fed fund rate cut by 25 basis points in September. This probability was around 62% just a week ago. Moreover, the interest rate derivative tool also shows a 76.5% probability of two rate cuts by the end of 2024.
Soft Economic Data
The Department of Labor reported that the U.S. economy added 206,000 jobs in June higher than the consensus estimate of 190,000. However, the data was lower than May’s job additions of 218,000. More importantly, actual job additions in May and April were revised significantly downward by 54,000 and 57,000, respectively.
The unemployment rate unexpectedly climbed to 4.1%, beating the consensus estimate of 4%. This marked the highest level since October 2021. The real unemployment rate (which counts discouraged workers and those holding part-time jobs for economic reasons) stayed flat at 7.4%. This marked the highest level since November 2021.
Average hourly earnings increased 0.3% for the month in June and 3.9% from a year ago, both in line with estimates. However, the data for May was 0.4% and 4%, respectively. The average workweek remained flat at 34.3 hours.
The core personal consumption expenditure (PCE) price index (excluding volatile food and energy items) rose 0.1% month over month in May compared with 0.3% growth in April. Year over year, core PCE inflation — the Fed’s most favorite inflation gauge — rose 2.6% in May compared with 2.8% in April. May marked the lowest monthly rise of this metric since March 2021. Personal spending rose 0.2%, less than the consensus estimate of 0.3%. The metric for April was also revised downward to a gain of 0.1% compared with 0.2% reported earlier.
The Institute of Supply Management (ISM) reported that the manufacturing purchasing managers’ index (PMI) came in at 48.5% in June compared with 48.7% in May. The consensus estimate was 49.4%. Moreover, ISM services PMI for June unexpectedly contracted to 48.8% from 53.8% in May. The consensus estimate was 52.8%. Any reading below 50% indicates a contraction in activities.
Rate Cut Expectations Rise
Following the release of several key economic data that were softer than estimates, a section of economists and financial experts already raised the alarm that the Fed should start reducing the benchmark lending rate from September. Otherwise, it will be too late and the economy may enter into a recession.
Notably, the benchmark interest rate is currently in the range of 5.25-5.5%, marking the highest level in 23 years. The yield on the benchmark 10-Year U.S. Treasury Note fell to 4.277% from 4.793% in mid-April.
Why Mid-Cap Tech Stocks
A lower interest rate regime will benefit growth sectors like technology. The ongoing astonishing rally of U.S. stock markets for the past one and half years is predominantly being driven by the technology sector. Since the beginning of 2023, the Fed first reduced the magnitude of rate hike and then totally stopped hiking it in July 2023. Since the beginning of 2024, investors have been waiting for the central bank to start rate cut.
Meanwhile, the ongoing tech rally was led by a massive thrust toward artificial intelligence (AI), especially generative AI. Consequently, the major gainers were technology giants. Some of these stocks have flourished 100-200% in the past year. Aside from technology behemoths, several mid-cap tech stocks are set to benefit from the rally.
Our Top Picks
We have narrowed our search to five mid-cap technology stocks that have strong potential for the rest of 2024. These stocks have seen positive earnings estimate revisions in the last 60 days. Each of our picks carries either a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The chart below shows the price performance of our five picks in the past month.
Image Source: Zacks Investment Research
Paycom Software Inc.’s (PAYC - Free Report) strong financial performance reflects continued growth despite disruptions caused by macroeconomic headwinds. PAYC’s revenues increased due to new client additions and a continued focus on cross-selling to existing clients.
PAYC’s differentiated employee strategy, measurement capabilities and comprehensive product offerings are helping it win new customers. PAYC’s solutions, like Ask Here and Manager on-the-Go, focusing on employee usage and efficiency, are acting as tailwind.
Zacks Rank #1 Paycom Software has an expected revenue of 10.2% for the current year. Although its earnings growth rate is negative for the current year, it is 11.4% for next year. The Zacks Consensus Estimate for current-year earnings has improved 0.3% over the last 30 days.
Dropbox Inc. (DBX - Free Report) provides a content collaboration platform worldwide. DBX’s platform allows individuals, families, teams, and organizations to collaborate and sign up for free through its website or app, as well as upgrade to a paid subscription plan for premium features. DBX serves customers in professional services, technology, media, education, industrial, consumer and retail, and financial services industries.
Zacks Rank #1 Dropbox has an expected revenue and earnings growth rate of 1.7% and 7.1%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 5.5% over the last 60 days.
GitLab Inc. (GTLB - Free Report) offers GitLab, a DevOps platform, which is a single application that leads to faster cycle time and allows visibility throughout and control over various stages of the DevOps lifecycle. GTLB helps organizations in the United States, Europe, and the Asia Pacific to plan, build, secure, and deploy software to drive business outcomes. GTLB also provides related training and professional services.
Zacks Rank #2 GitLab has an expected revenue and earnings growth rate of 26.7% and 70%, respectively, for the current year (ending January 2025). The Zacks Consensus Estimate for current-year earnings has improved 61.9% over the last 60 days.
Impinj Inc. (PI - Free Report) operates a cloud connectivity platform in the Americas, the Asia Pacific, Europe, the Middle East, and Africa. PI’s platform wirelessly connects items and delivers data about the connected items to business and consumer applications. PI’s platform comprises endpoint ICs, a miniature radios-on-a-chip that attaches to a host item and includes a number to identify the item.
PI primarily serves retail, supply chain and logistics, automotive, aviation, banking, datacenters, food, healthcare, industrial and manufacturing, linen and uniform tracking, sports, and travel industries through original equipment and device manufacturers, tag service bureaus, systems integrators, value-added resellers, independent software vendors, and other solution partners.
Zacks Rank #2 Impinj has an expected revenue and earnings growth rate of 3.3% and 12.9%, respectively, for the current year (ending June 2025). The Zacks Consensus Estimate for current-year earnings has improved 33.8% over the last 60 days.
CACI International Inc. (CACI - Free Report) provides expertise and technology to enterprise and mission customers in support of national security missions and government modernization in the intelligence, defense, and federal civilian sectors. CACI operates through two segments: Domestic Operations and International Operations. CACI designs, implements, protects, and manages secure enterprise IT solutions.
Zacks Rank #2 CACI International has an expected revenue and earnings growth rate of 15.1% and more than 100%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.4% over the last 60 days.
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Rate Cut Hope Soars on Soft Economic Data: 5 Mid-Cap Tech Picks
Wall Street market participants have suddenly turned optimistic on interest rate cuts by the Fed following the recently released soft economic readings. The CME FedWatch tool currently shows a 78% probability of a Fed fund rate cut by 25 basis points in September. This probability was around 62% just a week ago. Moreover, the interest rate derivative tool also shows a 76.5% probability of two rate cuts by the end of 2024.
Soft Economic Data
The Department of Labor reported that the U.S. economy added 206,000 jobs in June higher than the consensus estimate of 190,000. However, the data was lower than May’s job additions of 218,000. More importantly, actual job additions in May and April were revised significantly downward by 54,000 and 57,000, respectively.
The unemployment rate unexpectedly climbed to 4.1%, beating the consensus estimate of 4%. This marked the highest level since October 2021. The real unemployment rate (which counts discouraged workers and those holding part-time jobs for economic reasons) stayed flat at 7.4%. This marked the highest level since November 2021.
Average hourly earnings increased 0.3% for the month in June and 3.9% from a year ago, both in line with estimates. However, the data for May was 0.4% and 4%, respectively. The average workweek remained flat at 34.3 hours.
The core personal consumption expenditure (PCE) price index (excluding volatile food and energy items) rose 0.1% month over month in May compared with 0.3% growth in April. Year over year, core PCE inflation — the Fed’s most favorite inflation gauge — rose 2.6% in May compared with 2.8% in April. May marked the lowest monthly rise of this metric since March 2021. Personal spending rose 0.2%, less than the consensus estimate of 0.3%. The metric for April was also revised downward to a gain of 0.1% compared with 0.2% reported earlier.
The Institute of Supply Management (ISM) reported that the manufacturing purchasing managers’ index (PMI) came in at 48.5% in June compared with 48.7% in May. The consensus estimate was 49.4%. Moreover, ISM services PMI for June unexpectedly contracted to 48.8% from 53.8% in May. The consensus estimate was 52.8%. Any reading below 50% indicates a contraction in activities.
Rate Cut Expectations Rise
Following the release of several key economic data that were softer than estimates, a section of economists and financial experts already raised the alarm that the Fed should start reducing the benchmark lending rate from September. Otherwise, it will be too late and the economy may enter into a recession.
Notably, the benchmark interest rate is currently in the range of 5.25-5.5%, marking the highest level in 23 years. The yield on the benchmark 10-Year U.S. Treasury Note fell to 4.277% from 4.793% in mid-April.
Why Mid-Cap Tech Stocks
A lower interest rate regime will benefit growth sectors like technology. The ongoing astonishing rally of U.S. stock markets for the past one and half years is predominantly being driven by the technology sector. Since the beginning of 2023, the Fed first reduced the magnitude of rate hike and then totally stopped hiking it in July 2023. Since the beginning of 2024, investors have been waiting for the central bank to start rate cut.
Meanwhile, the ongoing tech rally was led by a massive thrust toward artificial intelligence (AI), especially generative AI. Consequently, the major gainers were technology giants. Some of these stocks have flourished 100-200% in the past year. Aside from technology behemoths, several mid-cap tech stocks are set to benefit from the rally.
Our Top Picks
We have narrowed our search to five mid-cap technology stocks that have strong potential for the rest of 2024. These stocks have seen positive earnings estimate revisions in the last 60 days. Each of our picks carries either a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The chart below shows the price performance of our five picks in the past month.
Image Source: Zacks Investment Research
Paycom Software Inc.’s (PAYC - Free Report) strong financial performance reflects continued growth despite disruptions caused by macroeconomic headwinds. PAYC’s revenues increased due to new client additions and a continued focus on cross-selling to existing clients.
PAYC’s differentiated employee strategy, measurement capabilities and comprehensive product offerings are helping it win new customers. PAYC’s solutions, like Ask Here and Manager on-the-Go, focusing on employee usage and efficiency, are acting as tailwind.
Zacks Rank #1 Paycom Software has an expected revenue of 10.2% for the current year. Although its earnings growth rate is negative for the current year, it is 11.4% for next year. The Zacks Consensus Estimate for current-year earnings has improved 0.3% over the last 30 days.
Dropbox Inc. (DBX - Free Report) provides a content collaboration platform worldwide. DBX’s platform allows individuals, families, teams, and organizations to collaborate and sign up for free through its website or app, as well as upgrade to a paid subscription plan for premium features. DBX serves customers in professional services, technology, media, education, industrial, consumer and retail, and financial services industries.
Zacks Rank #1 Dropbox has an expected revenue and earnings growth rate of 1.7% and 7.1%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 5.5% over the last 60 days.
GitLab Inc. (GTLB - Free Report) offers GitLab, a DevOps platform, which is a single application that leads to faster cycle time and allows visibility throughout and control over various stages of the DevOps lifecycle. GTLB helps organizations in the United States, Europe, and the Asia Pacific to plan, build, secure, and deploy software to drive business outcomes. GTLB also provides related training and professional services.
Zacks Rank #2 GitLab has an expected revenue and earnings growth rate of 26.7% and 70%, respectively, for the current year (ending January 2025). The Zacks Consensus Estimate for current-year earnings has improved 61.9% over the last 60 days.
Impinj Inc. (PI - Free Report) operates a cloud connectivity platform in the Americas, the Asia Pacific, Europe, the Middle East, and Africa. PI’s platform wirelessly connects items and delivers data about the connected items to business and consumer applications. PI’s platform comprises endpoint ICs, a miniature radios-on-a-chip that attaches to a host item and includes a number to identify the item.
PI primarily serves retail, supply chain and logistics, automotive, aviation, banking, datacenters, food, healthcare, industrial and manufacturing, linen and uniform tracking, sports, and travel industries through original equipment and device manufacturers, tag service bureaus, systems integrators, value-added resellers, independent software vendors, and other solution partners.
Zacks Rank #2 Impinj has an expected revenue and earnings growth rate of 3.3% and 12.9%, respectively, for the current year (ending June 2025). The Zacks Consensus Estimate for current-year earnings has improved 33.8% over the last 60 days.
CACI International Inc. (CACI - Free Report) provides expertise and technology to enterprise and mission customers in support of national security missions and government modernization in the intelligence, defense, and federal civilian sectors. CACI operates through two segments: Domestic Operations and International Operations. CACI designs, implements, protects, and manages secure enterprise IT solutions.
Zacks Rank #2 CACI International has an expected revenue and earnings growth rate of 15.1% and more than 100%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.4% over the last 60 days.