What happened
A broad cross-section of stocks resumed the rally that began earlier this month. This helped many stocks pull higher, following the updraft of the broader market indexes as they gained ground. Many technology stocks have been punished since reaching highs late last year and investors are increasingly convinced that while market volatility may remain prevalent for some time, there may be light at the end of the tunnel, suggesting the worst of the bear market may be in the rearview mirror.
As a result, Shopify (SHOP 4.90%) surged 3.6%, Nvidia (NVDA 3.65%) jumped 4.8%, and Roku (ROKU 5.41%) gained 7.3% as of 12:58 p.m. ET.
Image source: Getty Images.
So what
After a review of all the usual sources, including regulatory filings, changes to analysts' opinions, and earnings reports, very little in the way of company-specific news emerged to explain the surge in Shopify, Nvidia, and Roku's share prices.
Rather, after considering the broad macroeconomic headwinds, investors appear convinced that stocks may be much closer to the bottom than the top and are searching for compelling opportunities. Indeed, the major market indexes remain firmly entrenched in bear market territory, with the S&P 500 and Nasdaq Composite down 20% and 31%, respectively, from their highs reached late last year.
These periods of economic unrest have historically been among the best times to buy stocks to hold for the long term. This continuing reality had bargain hunters scouring the investing landscape, looking for beaten-down stocks to add to their portfolios.
Investor sentiment has turned largely positive in October, however, helping push the major market indexes higher. Technology stocks have been among those hardest hit over the past year, as many carry higher valuations consistent with better growth prospects. Many stock buyers shunned higher-risk, higher-reward investments in favor of safer places to park their money until the macroeconomic storm subsides.
This threesome make up solid examples of the resulting fallout on technology stocks, as Nvidia has fallen 61%, Shopify is down by 82%, and Roku has dropped 83% compared to last year's highs.
On a more positive note, however, investors are increasingly confident that the Federal Reserve's ongoing battle to control rampant inflation might finally be yielding results.
One such indicator is the slowing in retail real estate. The U.S. housing market, which has been on fire, is finally moderating. Existing home sales declined 1.5% sequentially in September and are down a whopping 23.8% year over year.
While median home prices rose 8.4%, it marked the third consecutive month of slowing gains. This data suggests that the Fed's campaign of rising interest rates may finally be having the desired effect.
Furthermore, comments by Minneapolis Fed chief Neel Kashkari suggest the central bank expects inflation to abate in the coming months. "My best guess right now is yes, do I think inflation is going to level out over the next few months, the services, the core inflation, and then that would position us some time next year to potentially pause [interest rate hikes]," Kashkari said at an event last week.
This, and increasingly optimistic investor sentiment, has helped propel the broader markets higher, as the S&P 500 and Nasdaq have gained 7.2% and 5.6%, respectively, so far this month.
Now what
While investors are currently optimistic, the market is only one negative economic indicator away from resuming its downtrend, so there are likely further share price swings ahead for Nvidia, Shopify, and Roku.
As inflation remains near 40-year highs, consumers are paring back e-commerce spending, foregoing the latest gaming processors, and putting off the purchase of a new connected TV or streaming device, which will weigh on the near-term results of Shopify, Nvidia, and Roku, respectively. Given the economic uncertainty, cautious purchasing decisions will likely also be the hallmark for the upcoming holiday season as well. On the other hand, the current landscape has resulted in the cheapest valuations in years for our trio of stocks, making them particularly appealing to those that plan to hold for the coming three to five years.
Some investors will still consider Nvidia and Shopify somewhat pricey, currently selling for 10 times and 6 times next year's sales. Roku is the cheapest of the three, with a price-to-sales ratio of 2. That doesn't mean these stocks can't fall further -- they certainly could. Still, for investors with the appropriate investing time horizon, these industry leaders have a history of beating the market in the long run.
