What happened
A broad cross-section of stocks rallied on Monday, recovering from last week's drubbing and buoyed by a manufacturing report that suggests inflation may be slowing.
With that as a backdrop, a number of technology stocks outpaced the broader market indexes. Shares of e-commerce platform provider Shopify (SHOP -2.37%) rose as much as 3.2%, semiconductor specialist Nvidia (NVDA 3.71%) jumped as much as 3.7%, and streaming video pioneer Roku (ROKU 1.58%) surged as much as 4.3%. As of 2:50 p.m. ET, the trio were still trading higher, gaining 1.6%, 2.7%, and 4.1%, respectively. These stocks followed the broader market higher, as the S&P 500 and the Nasdaq Composite gained 2.9% and 1.7%, respectively.
There was no company-specific news driving the gains, but shares of these companies have been punished over the past year, so investors were using any positive news to look for bargains among the rubble. The latest report on manufacturing data provided investors with the excuse they were looking for to buy shares of beaten-down technology stocks.
So what
A report by the not-for-profit Institute for Supply Management revealed that manufacturing activity declined again during September. The Manufacturing Purchasing Managers Index (PMI) came in at 50.9%, down from 52.8% in August. It's important to note that any figure above 50% suggests expansion in the overall manufacturing economy, albeit at a slower rate. This came in below economists' consensus estimates of 52.3%, but represents the 28th consecutive month of growth, after the economy contracted during April and May, 2020, according to the report.
Another metric in the report, the prices index -- which measures prices paid -- declined for the sixth straight month. This suggests that inflation may be easing, as manufacturers are paying less for component parts.
Now what
It's worth noting that a check of all the usual sources shows there haven't been any recent regulatory filings, earnings reports, or specific business developments for the trio of companies, so they appear to be following the broader market higher.
So what does the manufacturing report have to do with technology stocks? It isn't so much the report itself, though the fact that manufacturing activity hasn't fallen into contraction territory is a positive development. Wall Street took the suggestion that inflation may be easing as good news.
The Federal Reserve Bank has left no question that it will continue to fight rising inflation with an aggressive campaign of interest rate hikes. The most recent increase came in late September, as the Fed bumped interest rates up by 0.75%, the third such increase since June and the fifth rate hike so far this year. The federal funds rate now stands in a range of between 3% and 3.25%, its highest level since 2008.
Each of these stocks has been negatively affected by runaway inflation. With everything costing more, consumers have been cutting back where they can. Gamers are buying fewer high-end graphics processing units (GPUs) from Nvidia, consumers are cutting back on e-commerce transactions impacting Shopify, and streaming account growth has slowed at Roku. Inflation may finally be easing, which in turn would cause the Fed to stop -- or at least slow -- its campaign of rising interest rates. These would both be positive developments for the economy, which is buoying the market and these technology stocks.
The recent stock market plunge has resulted in a rare opportunity to get these growth stocks at a discount. That isn't to say that they won't fall lower -- they certainly might. However, each of these stocks is currently trading at or near multiyear-low valuations, making them as cheap as they've been in years.
Nvidia, Shopify, and Roku stocks are currently selling at 10 times, five times, and two times next year's sales, when a reasonable price-to-sales ratio is between 1 and 2. For investors looking three to five years into the future, buying shares in these top-notch companies while their valuations are near historic low valuations will seem like a brilliant move.
