What happened
Shares of 3D content-creation platform Unity Software (U 2.09%) soared 12.9% higher today as of market close. It was a fantastic day of market outperformance, given that the S&P 500 Index was up just under 0.2% and the Nasdaq Composite was up 1.8%. https://finance.yahoo.com/quote/U/?p=U
Even after today's jump, though, Unity stock is down 70% so far in 2022 and 82% off of its all-time highs reached late in 2021.
So what
A myriad of factors contributed to Unity's rally today. The most apparent was a falling 10-year U.S. Treasury yield, which ended the day at a 2.8% annual yield compared to about 3.5% in mid-June. Lower interest rates increase the present value of risk assets like stocks, especially those of high-growth companies like Unity that don't generate a profit yet. Conversely, higher interest rates lower the present value of stocks, which is one of the reasons Unity has been stuck in free fall this year.
Data by YCharts.
Now what
But why the sudden backtracking in interest rates? After all, the U.S. Federal Reserve is still expected to hike its short-term interest rate again late in July.
Investors have now turned their attention to the rising chance of a recession, though, which is why interest rates are taking a tumble (at least for the time being). Other areas of the market were also under pressure today, like the cyclical oil and energy sectors. It seems that runaway inflation is beginning to hamper consumer activity, paving the way for possible energy-demand destruction and eventually lower prices (maybe lower inflation, too!).
Of course, recession isn't good news, so Unity's rise might be confounding. But bear in mind that this is still a fast-growing company that provides next-gen services for businesses (like digital twin creation to help with organizational planning). Also, video games are a fairly resilient consumer spend category. In fact, some people increase their at-home consumption of games in tough times.
Either way, with the stock already having plunged this year, all of this negativity is probably priced into Unity shares at this juncture. Thus, the smallest shred of good news (like moderating interest rates) is causing a big rally for this high-growth cloud software provider.
