What happened
A broad cross-section of stocks roared higher on Tuesday, as market watchers focused on the Federal Reserve Bank's ongoing battle to cool red-hot inflation. The latest U.S. government data showed that inflation cooled somewhat last month, which could convince the Fed to alter the pace and tenor of its campaign of interest rate hikes, which are designed to battle inflation.
With that as a backdrop, shares of Nvidia (NVDA -3.33%) climbed 1.5%, Shopify (SHOP -2.37%) rose 1.2%, and The Trade Desk (TTD 3.35%) jumped 3.8%, as of 12:49 p.m. ET.
A check of all the usual sources uncovered very little in the way of company-specific news fueling the rally, which suggests investors were primarily fixated on the improving economic data.
Image source: Getty Images.
So what
The U.S. Bureau of Labor Statistics released its monthly inflation data for November and the report held good news for consumers and investors alike. The Consumer Price Index (CPI), the most widely followed measure of inflation, rose 7.1% in November compared to the year-ago period, while edging just 0.1% higher month over month.
While still high by historical standards, inflation actually improved compared to October's read of 7.7%, while also notching its lowest rate since December 2021. This was better than economist's forecasts of 7.3%. The "core" data, which excludes extremely volatile food and energy prices, climbed 6% year over year, also lower than the 6.1% predicted by economists.
Not all the news was good. The food and energy indexes both increased, climbing to 10.6% and 13.1%, respectively, which helps illustrate the challenges that remain.
Several improving reads on the economy in recent weeks make it more likely that the Fed can ease up on the pace of interest rate hikes, or potentially lower the rate of its increases. The Fed uses interest rates in an attempt to cool rising inflation. When borrowing is more expensive, consumers and businesses tend to spend less. This results in slowing demand, which in turn causes prices to fall. However, given the complexity of the economy, the process is more art than science. The Fed is trying to slow an overheated economy without slowing it too quickly, for fear of pushing the country into recession.
There was one piece of company-specific news, specifically regarding The Trade Desk. Citi analyst Ygal Arounian initiated coverage of The Trade Desk with a buy rating and $60 price target, which represents potential upside of roughly 22% compared to Monday's closing price. The analyst noted that much of the challenging macro environment is already reflected in the share price, resulting in a positive risk/reward going into 2023.
Now what
While investors are celebrating now, it's important to remember the prevailing attitude, which is typically "what have you done for me lately?" This means it could only take one negative economic report for stocks to resume their year-long retreat.
Furthermore, the current macroeconomic environment still presents challenges for this trio of companies:
- Nvidia has already seen a significant decline in demand for its high-end graphics processing units (GPUs), as consumers are putting off upgrading to the latest and greatest semiconductors used for gaming.
- Consumers are lowering discretionary spending, which could mean fewer purchases on e-commerce sites powered by Shopify.
- Marketing budgets are getting the ax in response to economic uncertainty, which will weigh on The Trade Desk's adtech platform.
However, for those who like to view the glass as half-full, there's a rosier perspective. Bear markets tend to take down good and bad companies alike. As a result, each of these stocks is selling for a significant discount to the prices of just a year ago, making their valuations much more compelling. This gives investors an opportunity to pick up these stocks at discounted prices, though none are cheap in terms of traditional valuation metrics.
Nvidia, The Trade Desk, and Shopify are currently selling for 15 times, 13 times, and 7 times next year's sales, when a reasonable price-to-sales ratio is between 1 and 2. However, these valuations are near all-time lows and investors tend to reward companies with a history of strong growth and robust prospects with a premium valuation.
For investors with the appropriate three-to-five-year investing time horizon and a stomach for a little volatility, buying shares of these industry leaders while they're on sale will seem like a genius move years from now.
