What happened
Wall Street started the day in rally mode on Thursday. This helped push many stocks higher, caught in the updraft of the broader market indexes as they gained ground. The sell-off in technology stocks over the past year has been particularly brutal, but there may be light at the end of the tunnel, giving investors hope the worst of the bear market may finally be in the rearview mirror. The latest read on inflation added to investor optimism, helping fuel the market gains.
As a result, as of 11:27 a.m. ET, Nvidia (NVDA 1.68%) had jumped 9.5%, Snowflake (SNOW 2.65%) had gained 15%, and Shopify (SHOP 0.34%) had surged 15.6%.
Image source: Getty Images.
So what
The U.S. Bureau of Labor Statistics released its monthly report on inflation, and the data gave investors and consumers alike reason to celebrate. The Consumer Price Index (CPI), the most widely followed measure of inflation, rose 7.7% in October compared to the year-ago period, while increasing 0.4% on a seasonally adjusted basis.
The key metric remained lower than the 8.5% peak it reached in July, but was better than the 7.9% increase economists had predicted. The "core" data, which excludes highly volatile food and energy prices, climbed 6.3% year over year -- still near historical highs -- but lower than the 6.5% economists had predicted.
While the overall numbers were better, there were also signs that challenges remain. The energy index rose after three successive months of declines, up 17.5% year over year, driven by higher fuel and natural gas prices. Surprisingly, the biggest factor driving inflation wasn't energy but housing prices, which posted their largest monthly increase since August 1990.
Furthermore, a review of all the usual sources -- regulatory filings, changes to analysts' sentiments, and earnings reports -- revealed very little in the way of company-specific news to explain the surge in Nvidia's, Shopify's, and Snowflake's share prices, suggesting they were simply reacting to the improving macroeconomic outlook.
After considering the current landscape, investors seem convinced that stock prices are nearer the bottom than the top. Technology stocks are still deep in bear market territory, with the Nasdaq Composite down 32% from its high reached late last year. Yet periods when the economy flounders have historically been the best times to buy stocks with the intention of holding them for years. This simple fact has bargain hunters out in full force, looking for beaten-down stocks worthy of their investing dollars.
These three stocks are solid examples of the impact of the ongoing economic fallout for technology stocks, as Nvidia has fallen 55%, Snowflake has dropped 64%, and Shopify has cratered 79% compared to last year's highs.
Now what
It's important to remember that while Wall Street is currently optimistic, that could change in a heartbeat. The market will continue to be tumultuous and is only one negative economic report away from turning south again, so there will likely be further share price swings ahead for Nvidia, Shopify, and Snowflake.
Despite the notable improvement, inflation remains high compared to historical standards, which is particularly tough on consumers as we enter the holiday season. This will likely cause people to rein in e-commerce spending and hold off on upgrading to the latest gaming chip, pressuring Shopify and Nvidia. Companies are looking to cut back where they can, so it's easy to envision a scenario in which businesses spend less on data storage and analysis costs, which could hurt Snowflake.
Rising interest rates are also raining on the parade. The Federal Reserve Bank recently raised the overnight lending rate to a range of 3.75% to 4%, its highest level since early 2008. It also marks the sixth increase so far this year.
These factors will likely continue to weigh on this trio of stocks. On the other hand, the current environment affords investors valuations at multiyear lows for these stocks, making them particularly enticing to those with a long-term strategy and plans to hold for the next three to five years -- but they're not for everyone.
These stocks still aren't cheap in terms of traditional valuation metrics, as Shopify, Nvidia, and Snowflake are currently selling for 7 times, 12 times, and 15 times next year's sales, when a "reasonable" price-to-sales ratio is between 1 and 2. However, as leaders in their respective fields, the investing community has decided that each stock is deserving of a premium.
That doesn't mean these stocks can't fall further -- they still might. But for investors with an appropriate investing time horizon, these high-growth stocks will likely beat the market over time.
