What happened

The recent volatility that has plagued the major stock market indexes continued this week. After several days of declines, Wall Street was finally able to mount a rally Thursday as investors digested the latest unemployment report, which brought some (potentially) good news. The Federal Reserve Bank's campaign of rising interest rates may finally be cooling the overheated economy -- at least if the job numbers are any indication.

With that as a backdrop, C3.ai (AI 1.28%) climbed 4.5%, Shopify (SHOP -1.57%) jumped 5.6%, and Palantir (PLTR -0.19%) rallied 6.3% as of 1:17 p.m. ET.

A check of all the usual sources -- press releases, regulatory filings, or financial results -- found no company-specific news driving the upward momentum. This suggests that after reviewing the data, investors were convinced that the job data hinted at better days to come. 

A person reviewing graphs on a computer monitor.

Image source: Getty Images.

So what

The weekly unemployment report from the U.S. Department of Labor showed that initial jobless claims climbed by 9,000 to 225,000 for the week ending Dec. 24, exactly as economists had predicted. Furthermore, the number of people already collecting unemployment benefits grew by 41,000, rising to 1.71 million, marking the highest level since February. While the results are still low compared with historical averages, the increases mean that jobs simply aren't as easy to find as they have been, suggesting employers are scaling back on hiring.

While that would normally be viewed as troublesome, in this instance, the news is moderately good in the context of the overall economy. The central bank raised interest rates a total of seven times in 2022, bringing the overnight lending rate to its highest level in 15 years, in a bid to combat rising inflation. 

When interest rates are higher, borrowing becomes more expensive, which in turn causes consumers and businesses to cut back on spending. Lower demand ultimately results in falling prices -- at least in theory. Since the process is more art than science, there's no exact timetable on when this campaign will end. The data suggests that the Fed is making progress toward its goal, though more data will be needed to know for sure. 

The Fed has been crystal clear that bringing rising inflation under control is its top priority. Unfortunately, there's a fine line between cooling an overheated economy to rein in rising prices and slowing growth too quickly, which could cause a recession -- something the Fed well knows.

Now what

The current state of the economy represents both challenges and opportunities for our trio of software-as-a-service (SaaS) companies.

  • Over the past year -- like many in the digital retail space -- Shopify has felt the sting of slowing e-commerce growth. Furthermore, inflation has pinched consumer spending, which could continue to weigh on the company's results. On the bright side, however, Shopify announced late last month that the platform set a new record for Black Friday through Cyber Monday, with sales of $7.5 billion. This represented an increase of 19% year over year and 21% in constant currency, which could spell good news for the company.
  • In the face of the economic uncertainty that has characterized the past year, businesses have been cutting back on discretionary spending, including the business analytics and artificial intelligence services offered by Palantir and C3.ai. That said, these platforms help other companies operate at peak efficiency and could experience strong rebounds once the economy is on a more secure footing.

Seasoned investors know to ignore the day-to-day fluctuations that come with investing. They instead focus on the long-term opportunities of innovative and disruptive businesses, allowing them to pick up beaten-down stocks at a discount. Shopify is an industry leader in providing cloud-based e-commerce tools for merchants. Even the slightest improvement in the economic outlook could bring a flood of entrepreneurs out of the woodwork, which would do wonders for Shopify. Likewise, an improving economy would cause existing businesses to loosen their purse strings and work to gain the competitive advantages that Palantir and C3.ai provide.

For optimistic investors with a long-term outlook, buying opportunities are plentiful. These stocks are all selling for a significant discount compared with their prices of just one year ago, but none are cheap in terms of traditional valuation metrics. Shopify, Palantir, and C3.ai are selling for a respective 7 times, 6 times, and 4 times next year's sales, when most experts agree that a reasonable price-to-sales ratio is between 1 and 2. That said, each of these stocks is selling at or near its lowest valuation ever. This suggests investors expect big things from our trio of companies in the future.

Those with a stomach for volatility and a certain degree of risk might consider adding shares of these innovative and disruptive companies as an appropriately sized part of a diverse portfolio.