What happened
Broad market indexes are in retreat again today, building on the declines suffered during the first week of 2022. Investors are mulling the effects of higher interest rates on the economy after minutes from the Federal Reserve's latest meeting, released last week, indicated more rate hikes might be in store than originally thought. Inflation is high, and getting cost increases back under control is the name of the game right now.
Even some of the biggest companies out there sporting solid growth rates are under pressure as a result. As of 1:25 p.m. ET today, shares of Meta Platforms (META 0.43%) (Facebook's new name) were down 2.6%, Salesforce.com (CRM 0.42%) was down 1.9%, and Block (SQ 2.32%) (formerly Square) was down 3.5%.
Image source: Getty Images.
So what
Higher interest rates lower the future value of cash flows, which in turn lowers the present value of a stock. Since high-growth companies are expecting the biggest increases in future profitability, they can be extremely sensitive to changes in interest rates. With the Fed indicating it might hike rates four times this year, 10-year Treasury yields have gone from as low as 1.4% last month to nearly 1.8% today.
Now what
It's been a bloodbath for growth stocks as of late, starting with the arrival of the omicron variant last year. However, though the current narrative has been incredibly negative, little has fundamentally changed for these businesses. Meta will still get long-term lift from increased digital ad spend, and indications are that its Oculus virtual-reality business is doing quite well.
Salesforce is benefiting from rapid IT migration to cloud computing. And Block is enjoying steady digital payments growth, as well as fast adoption of its Cash App among younger generations.
Bouts of extreme volatility are gut-wrenching, but if you bought any of these three stocks or another high-growth name, stay focused on their long-term potential. Assuming business momentum continues, sharp sell-offs like this most recent one are totally normal for all growing companies.
