What happened
The stock market was rallying Wednesday morning ahead of the Federal Reserve's anticipated announcement regarding a hike to the federal funds rate. As of noon ET, the S&P 500 was up by 1.6%, and the NASDAQ Composite was up by nearly 2.7%.
Many well-known tech stocks were outperforming the average, though. Salesforce.com (CRM -0.57%) had rallied by 3.6%, Facebook parent Meta Platforms (META -4.13%) was up 4.2%, and Zoom Video Communications (ZM -0.82%) had jumped by 6.2%.
Image source: Getty Images.
So what
The Fed has indicated that it will raise interest rates a few times this year as it tries to push back against inflation that is at its highest levels since the early 1980s. For an entire generation of young investors, inflation has been an economic factor often talked about but only minimally experienced. Now, with the longer-term ripple effects of the pandemic creating worldwide supply chain disruptions and a host of issues making various supply shortages even worse, prices for energy, cars, housing, and food are spiking.
With conditions making it clear that the Fed will have to start boosting its benchmark interest rate from its current near-zero level, high-growth stocks, including many in the tech sector, have taken it on the chin. Higher interest rates reduce the present value of risk assets like stocks, especially those that are expected to experience larger gains to their profitability over time. Even after Wednesday morning's rally, Salesforce, Meta, and Zoom remain down 38%, 51%, and 84%, respectively, from their all-time highs.
Now what
The market has severely re-rated many high-growth stocks based on the expectation the Fed will get really aggressive in its fight against inflation this year. But Russia's invasion of Ukraine has cast some doubt on just how aggressive a stance the Fed will take. Time will tell.
In the meantime, stocks like Salesforce, Meta, and Zoom look cheap by some metrics -- especially given their long-term trajectories for continued revenue and earnings growth. Salesforce trades for 37 times trailing 12-month free cash flow (FCF), Zoom trades for 22 times FCF, and Meta for just 15 times FCF.
The Fed's plans have become a short-term headwind for these stocks, but for long-term investors, the actual financial progress these companies make will be much more important to focus on than what the central bank is doing or might do in the future.
