What happened

Wall Street kicked the day with a broad-based rally on Tuesday. This helped many stocks gain ground, propelled higher by the updraft of the broader market indexes.

Technology stocks have been mauled by the bear market over the past year, but investors got a glimmer of hope today that the economy may finally be on the mend. The latest read on inflation gave investors a much-needed boost of confidence, which helped fuel the rally.

As a result, the well-known FAANG stocks all rallied this morning. As of 11:10 a.m. ET:

  • Facebook parent Meta Platforms (META -0.82%) surged 4.9%,
  • Apple (AAPL 0.70%) rose 2%,
  • Amazon (AMZN -1.14%) climbed 3.1%,
  • Netflix (NFLX 0.72%) jumped 4.3%, and
  • Google parent Alphabet (GOOGL 0.27%) (GOOG 0.28%) rallied 4.4%.
A person clenching their fist in victory while looking at graphs on a computer.

Image source: Getty Images.

A review of all the usual sources -- regulatory filings, changes to analysts' estimates, and earnings reports -- revealed nothing in the way of company-specific news to explain why the FAANG stocks were higher, suggesting they were simply reacting to the improving read on the economy.

So what

The U.S. Bureau of Labor Statistics released its monthly report on inflation, and the data helped investors and consumers alike breathe a sigh of relief. The Consumer Price Index (CPI), the most widely followed gauge used to measure inflation, rose 7.1% year over year in November, while edging just 0.1% higher sequentially on a seasonally adjusted basis. 

While that would not normally be a cause for celebration, these are extraordinary times. The rate was down from a reading of 7.7% in October, and also better than the 7.3% predicted by economists. The "core" data, which excludes highly volatile food and energy prices, climbed 6% since this time last year -- still high by historical standards -- but also lower than economists' predictions of 6.1%. This also marked the lowest read on inflation since December of last year.

While the overall numbers were better, there were also signs that challenges remain. The year-over year increases were driven by higher food and energy prices, which rose 10.6% and 13.1%, respectively.

A declining read on inflation is important for a couple of reasons. The most obvious is that the cost of living has been historically high, causing consumers to make difficult choices on everything from groceries to fuel. Perhaps as important to market watchers is the potential impact the softening inflation will have on the Federal Reserve Bank and its continuing campaign of rising interest rates.

In order to rein in inflation, the Federal Reserve Bank increases interest rates, which makes borrowing more expensive. This generally results in consumers and businesses spending less. This, in turn, lowers demand, causing prices of everyday essentials to fall.

In short, the Fed's campaign of rising interest rates is working to bring about lower prices. The economy is a complex mechanism, however, and if it cools too quickly, it could cause a recession. So the central bank is walking a very fine line indeed.

Now what

While optimism is currently sweeping Wall Street, we're just one negative economic report away from stocks resuming their downward trend. Furthermore, even with minor improvements in the broader economic picture, challenges remain for our technology denizens, including:

  • Companies have been cutting back on marketing spending, which will continue to weigh on Alphabet's and Meta Platforms' adtech businesses, which derive nearly all their revenue from advertising.
  • Tighter budgets make it less likely that shoppers will splurge for high-end items like iPhones, Apple's biggest seller.
  • Overall belt-tightening means consumers may cut back on nonessential items like Netflix's streaming video service, while buying fewer discretionary items from Amazon's e-commerce platform.

On the other hand, with these stocks at multiyear lows, valuations are the cheapest they've been in years. They still might not be for everyone, however, as some still aren't cheap in terms of traditional valuation metrics.

For example, Apple is selling for 5 times next year's sales, while Netflix, Alphabet, and Meta Platforms have forward valuations of 4, 4, and 3, respectively. Amazon is the only one that truly is in bargain-basement territory, selling for less than 2 times next year's sales.

For context, experts generally consider a price-to-sales ratio of between 1 and 2 as reasonable. However, each company is a leader in its respective field, which is why investors have granted each a higher premium.

That doesn't mean stocks won't fall further from here -- history clearly shows they could. But for investors with a stomach for volatility and an appropriate investing time horizon, these growth stocks have a history of beating the market over time.