What happened
Amid an upbeat day for the overall market on Tuesday, many growth stocks are seeing outsize gains. To illustrate, here were the peak gains on Tuesday for four growth stocks:
- CrowdStrike Holdings (CRWD +0.68%): 6.9%.
- Pinterest (PINS +0.66%): 5.3%.
- Salesforce.com (CRM +2.88%): 4.4%.
- Sea Limited (SE +2.38%): 6.7%.
While these were the highest the stocks rose on Tuesday as of 1:45 p.m. ET, the four stocks were up 5.4%, 3.3%, 3.5%, and 2.3%, respectively, as of this writing.
These stocks' gains come as many growth stocks are rebounding from a sharp sell-off last week.
Image source: Getty Images.
So what
News last week that the Federal Reserve may begin raising interest rates and tapering its asset purchase program earlier than expected, as well as reports of a new coronavirus variant, spooked investors. Growth stocks were hit particularly hard as investors looked to reduce exposure to these faster-growing companies that are priced for expected free cash flow levels years into the future.
But investors seem to be changing their minds about the attractiveness of growth stocks. This reevaluation of their prospects is likely sparked by reports that the omicron variant may be milder than previous strains. This could make an economic rebound and global supply chain improvements more likely, potentially creating a good environment for capitalism.
Now what
There are, of course, still risks that the omicron variant poses a greater threat than expected. For instance, there are also reports that the virus may spread faster than previous strains. Plus, it will be interesting to see how the market reacts when the Fed actually begins its tapering program.
Of course, investors should keep the long term in perspective. While rate hikes are notable, they will likely be modest. In other words, the market will still be in a low interest rate environment. It's also unlikely that companies like CrowdStrike, Pinterest, Salesforce, and Sea Limited will actually be impacted materially by modest and gradual rate hikes. Sure, their stock prices could take hits in the short term. But their underlying businesses have powerful catalysts that will likely persist through an evolving interest rate environment.
Finally, it's always possible that the market has already priced in the Fed's eventual move to raise interest rates. After all, many growth stocks have fallen sharply recently -- even including today's gain. In fact, all four of these companies' stocks have underperformed the S&P 500 over the past three months, with CrowdStrike, Sea Limited, and Pinterest falling particularly hard. The three stocks are down 26%, 28%, and 31%, respectively, during this period.
Whatever happens in the near term, investors should stay focused on these growth stocks' underlying business and their analysis of whether they believe their valuations are attractive relative to their long-term potential. Over the long haul, these will likely be the determinants of how well these stocks perform -- not day-to-day market headlines and near-term interest rate changes.
