Why Palo Alto Networks, Palantir, and MongoDB Stocks All Traded Lower Thursday

What happened

Stocks in a wide range of sectors were trading lower on Thursday as investors focused on macroeconomic conditions and the Federal Reserve's ongoing battle against persistent high inflation, which has barely eased back from its near 40-year highs. Comments Thursday by a Fed official suggested that the central bank will continue to raise benchmark interest rates for the foreseeable future.

With that as a backdrop, many tech stocks lost ground. As of 12:31 p.m. ET, cybersecurity specialist Palo Alto Networks (PANW 1.37%) had slipped by 1.9%, cloud-native database provider MongoDB (MDB -2.10%) was down by 3.5%, and data mining and business intelligence company Palantir (PLTR -0.84%) stock had fallen by 3.8%. At that point in the session, the S&P 500 and the Nasdaq Composite were down by 0.6% and 0.5%, respectively.

There wasn't much in the way of company-specific news driving those tech companies' share price moves, but investors' fears that the Fed's fiscal tightening campaign might eventually cause a recession were a major catalyst helping to push the market lower.

So what

Members of the Federal Open Market Committee haven't minced words about their plans to continue raising interest rates until inflation is brought back under control. Recent improvements on several fronts had some investors hoping the Fed might pause its steady stream of interest rate hikes, but Federal Reserve Bank of St. Louis President James Bullard poured cold water on that idea Thursday, suggesting interest rates could still go much higher.

In comments to reporters after a scheduled appearance, Bullard said the Fed will continue aggressively fighting inflation, eventually lifting the benchmark federal funds rate to a minimum of 5% to 5.25%. 

"In the past, I have said 4.75% to 5%," Bullard commented. "Based on this analysis today, I would say 5% to 5.25%. That's a minimum level. According to this analysis, that would at least get us in the zone." He went even further, saying, "Thus far, the change in the monetary-policy stance appears to have had only limited effects on observed inflation, but market pricing suggests disinflation is expected in 2023."

Bullard was mum on the size of the interest rate hike the Federal Open Market Committee is likely to deliver after it next meets in mid-December. Thus far, the Fed has issued four successive hikes of 0.75 percentage points -- which brought the federal overnight lending rate to a range of 3.75% to 4% -- its highest rate since early 2008. Several of Bullard's colleagues have suggested a smaller increase might be appropriate this time, particularly given that inflation has eased slightly in recent months.

Just last week, the Bureau of Labor Statistics reported that the Consumer Price Index -- the most widely followed measure of U.S. inflation -- had increased by just 7.7% in October year over year. While that's still high, it was a notable improvement from the 8.2% increase it notched in September, and continued the downward trend that has been underway since it peaked at 9.1% in June. 

Now what

The economy remains in the throes of a slowdown that will likely take many more months -- not days or weeks -- to resolve. It is possible that the Federal Reserve's campaign of rate hikes could tip the economy into recession, though it is clearly trying to engineer a soft landing that would involve only a moderate economic slowdown. Indicators that the steady stream of interest rate hikes is likely to continue -- even if the next increases may be smaller ones -- didn't do much to calm the jittery nerves of investors.

The ongoing tug-of-war between inflation and recession could weigh heavily on this trio of technology companies. Each of them serves business and government customers, and those clients, feeling the pinch, have already begun to rein in their spending.

Palo Alto Networks provides cybersecurity solutions, including firewalls and software. Palantir's cutting-edge artificial intelligence and data mining capabilities help its clients extract meaningful information hidden deep within massive data sets. MongoDB's cloud-native database helps businesses store and search through all manner of unconventional data sources, rendering legacy databases nearly obsolete. While all of these services are necessary and useful, it's also easy to imagine businesses scaling back on them until the economy improves.

The good news, however, is that all of these stocks are cheaper than they have been in years, but their valuations still aren't for the faint of heart. MongoDB, Palantir, and Palo Alto Networks stocks are currently trading at 7 times, 7 times, and 6 times next year's sales, respectively. A reasonable price-to-sales ratio would be between 1 and 2. That said, investors with the stomach to handle volatility who buy shares in these next-generation companies now might look back on the decision as a smart move three to five years into the future.