What happened
Shares of renewable energy stocks were on fire Tuesday as the market digested earnings and interest rates plunged for the first time in a while. A combination of reasonable earnings in the third quarter and slowing inflation is proving to be a positive environment for stocks as investors project what the Federal Reserve will do with interest rates.
Shares of energy stocks were up across the board on Tuesday, but some of the big movers were ChargePoint Holdings (CHPT), jumping as much as 9%; Bloom Energy (BE -1.32%), popping 9.7%; and QuantumScape (QS -0.63%), rising 14.5%. As of 2:15 p.m. ET, shares of the three companies were up 8.1%, 6.7%, and 12.7%, respectively.
So what
The market has been worried about inflation leading to higher interest rates, which would then likely lead to a recession. This is why the stock market has fallen dramatically over the past year as interest rates have risen.
Target Federal Funds Rate Upper Limit data by YCharts
The data recently has changed that narrative a little. Inflation is slowing to almost zero on a month-over-month basis since June (year-over-year comparisons are still high), and early earnings reports have been relatively strong. This could be an indication the Federal Reserve may not crush the economy to get inflation under control, which is what happened in the late 1970s and early 1980s.
Bond investors have reacted by pushing bond yields sharply lower today. The 10-year Treasury rate in the U.S. is down 15 basis points today alone to 4.09%. That's a big move in the bond market.
Renewable energy companies often make money by building assets that have high up-front costs and generate revenue over decades. That means that interest rates have a big impact on how investors value those future cash flows because of higher discount rates (I explained this phenomenon in this video). Lower rates mean higher values for projects and in turn stocks.
Now what
What's not clear right now is whether or not the market's view of rates will hold for long. The Federal Reserve seems intent on beating inflation and may be willing to raise rates more than necessary to make sure inflation doesn't creep up again. Or it's possible it takes a foot off the gas at the next Fed meeting.
I'm generally bullish on the renewable energy space, but investors need to make sure that companies are able to be profitable in a higher interest rate environment. ChargePoint and QuantumScape, in particular, need to improve their financials to remain solvent. You can see below that QuantumScape is still pre-revenue and ChargePoint is burning almost as much cash as it's generating in revenue. Bloom Energy is losing money as well, but has a much more established business.
CHPT Free Cash Flow data by YCharts
Stocks are up big, but there are still a lot of risks for capital-intensive stocks in today's market. Be careful buying money-losing stocks because this may not be a market that's willing to wait years for profitability, even in renewable energy.
