What happened

FAANG stocks Alphabet (GOOG 0.72%) (GOOGL 0.83%)Meta Platforms (META 2.67%), and Netflix (NFLX 1.74%) jumped today after the October Consumer Price Index report showed inflation cooling off faster than expected.

According to the Bureau of Labor Statistics, consumer prices jumped 7.7% year over year in October, below expectations of 7.9%, and the October reading marked the slowest year-over-year growth rates since January. On a monthly basis, inflation was up 0.4%, below expectations of 0.6%.

Core inflation, which excludes more-volatile food and energy prices, was also lower than expected, rising just 0.3% from September and 6.3% over the last year.

The news makes it more likely that the Federal Reserve will slow the pace of its interest rate hikes, leading Treasury yields to plunge while stocks rallied on the news. Rising interest rates make bonds more attractive by comparison, but falling rates tend to attract money out of bonds and into stocks. 

As of 11:20 a.m. ET on Thursday, Alphabet stock was up 7.1%, while Meta had gained 7.2%, and Netflix was 5.6% higher. At the same time, the Nasdaq had jumped 5.8%, and the 10-year Treasury yield fell 7.5% to 3.85%, its lowest point in a month. 

A green line on a stock chart going up

Image source: Getty Images.

So what

All three of these FAANG stocks are sensitive to consumer spending and therefore inflation and interest rates. They also make much of their money from outside the U.S., and falling Treasury yields weakened the dollar, which fell 2% against a basket of currencies this morning.

Alphabet stock has dropped sharply over the past year on concerns over a slowing economy and possible recession. The business' performance has taken a hit from macroeconomic headwinds with revenue growth slowing to just 6% in its third quarter, or 11% in constant currency.

Advertising is a cyclical business, and it's generally one of the first expenses that businesses pull back on when they sense that demand is slowing or they need to cut costs. With inflation falling faster than expected, the bottom of the economic cycle could arrive sooner than investors had thought, which would be good news for Alphabet's Google since it's the leading digital advertising business.

Facebook parent Meta Platforms has faced similar headwinds, with its revenue shrinking in its most recent quarter. The company noted macroeconomic challenges in its most recent earnings report, but competition from TikTok as well as Apple's ad-targeting restrictions are also impacting its growth.

In a clear a sign of the challenges the company faces, yesterday it laid off 11,000 employees, or 13% of its workforce. Meta has also been spending aggressively on its metaverse project, and investors might be more permissive of that spending if they believe interest rates will soon peak, since the cost of losing that money, measured by the net present value, goes up as interest rates increase.

Lastly, Netflix is a consumer-driven business whose subscription model makes it less sensitive to the macro-level economy than consumer discretionary companies that depend on one-time purchases, like restaurants and travel busineses. However, competition has increased significantly in video streaming, and higher prices are likely to cause some consumers to reconsider their streaming budget.

Netflix also has $14 billion in debt, some of which it's likely to roll over in the coming years, so lower interest rates are to its advantage there. It's also launching its advertising tier this month, and a recession could hurt momentum in that new business.

Now what

Of the three of these stocks, Alphabet seems the most sensitive to the macro climate as the digital advertising leader, and its performance -- especially for Google Search -- is something of a bellwether for the overall economy.

Meta is currently struggling with cash burn from its metaverse project and competition in its ad business. But the stock has become so cheap that a shift in market sentiment would give it some much-needed momentum to recover. 

And Netflix's future will mostly be determined by the success of its new ad tier and its ability to win against a wide range of streaming options. But the stock would still be better off if the global economy can avoid a recession.

All three stocks should benefit if inflation continues to cool off, but Meta and Netflix face more-immediate challenges that investors will be watching closely.