What happened

The broader market indexes were squarely in rally mode Tuesday as investors focused on stubborn macroeconomic conditions and what it means for the Federal Reserve and its ongoing campaign to tame persistent inflation. The latest U.S. government data showed that while inflation cooled somewhat in February, it remains high, at least from an historical perspective.

With that as a backdrop, shares of Alphabet (GOOGL -1.43%) (GOOG -1.39%) jumped 3.1%, Shopify (SHOP -5.10%) rose 4.3%, and Meta Platforms (META -3.52%) was up 5.3% as of 11:25 a.m. ET.

Only one stock among our trio had company-specific news, which suggests investors were primarily focused on the economic data and what it suggests regarding the potential for upcoming interest rate hikes.

Smiling person looking at rising graphs on a computer monitor.

Image source: Getty Images.

So what

The U.S. Bureau of Labor Statistics released monthly inflation data for February and there was both good and bad news. The Consumer Price Index (CPI), the most widely followed gauge of inflation, increased 6% in February compared to the year-ago period while edging 0.4% higher for the month. 

While still historically elevated, there was movement in the right direction, as inflation actually improved compared to January's read of 6.4%. This also marked the eighth consecutive month of declines in the annual inflation rate since it peaked at 9.1% last June. Additionally, it represents the lowest year-over-year increase since September 2021. 

The decline probably wasn't enough to forestall a higher rate increase by the Fed when it meets next week, as the figures were merely in line with economists' predictions. The "core" data, which excludes highly volatile food and energy prices, climbed 5.5% year over year and 0.5% sequentially, largely in line with the 5.5% and 0.4% increases predicted by economists. 

The underlying data was still concerning. The food and energy indexes both jumped, rising 9.5% and 5.2%, respectively, suggesting that it will still be some time before consumers see lower prices in the grocery aisle and at the gas pump.

A drop -- or a slower increase -- in inflation rates might have given the central bank justification for a smaller rate increase in March. That said, in testimony before Congress earlier this month, Fed Chair Jerome Powell said that given the conditions, the interest rate hike could be higher than previously expected. 

Interest rates are the Fed's primary weapon to tame historically high inflation. Rate increases make borrowing money more expensive, causing consumers and businesses to cut spending. This, in turn, reduces demand, which eventually causes a corresponding weakening in prices. It's a complicated balancing act, however, trying to bring down inflation without going too far and sending the economy into a recession.

Nevertheless, investors saw the glass as half-full today, cautiously optimistic about the improving macroeconomic picture.

Now what

So what does monthly inflation data have to do with our trio of companies? The past year has been a brutal one for technology investors. Even after the recent rebound, Alphabet, Meta Platforms, and Shopify stocks are still down 37%, 50%, and 74%, respectively, from their peaks in mid- to late 2021.

Furthermore, the current macroeconomic environment still presents challenges for the three businesses:

  • Shopify's e-commerce platform provides merchants with the software-as-a-service (SaaS) tools they need to succeed in digital retail, but soaring prices and rising interest rates have consumers cutting back on spending, pressuring its results.
  • As companies reduce spending to weather the downturn, marketing budgets are among the first to be cut. As the world's No. 1 and No. 2 digital advertisers, Alphabet subsidiary Google and Meta Platforms have both seen demand slump for internet ads, a condition that could persist into the foreseeable future.

There was one piece of company-specific news helping drive Meta Platforms stock higher today. The company said in a regulatory filing that it's planning another round of layoffs, cutting 10,000 additional positions over the coming months, while canceling another 5,000 roles it had yet to fill. Investors hoped these cuts would help Meta better navigate the macroeconomic headwinds that remain.

For investors with a three- to five-year outlook, there's good news: Downturns take down good and bad companies alike. As a result, each of these stocks are much cheaper than they were at the start of the downturn, making their valuations compelling -- though none are inexpensive in terms of traditional valuation metrics.

SHOP PS Ratio (Forward 1y) Chart

Data by YCharts.

Shopify, Meta Platforms, and Alphabet are currently selling for 6.7 times, 3.6 times, and 3.5 times next year's sales, respectively, when a reasonable price-to-sales ratio is between 1 and 2. Investors tend to reward companies with a history of strong growth and future potential with a premium valuation -- and these are currently still near their all-time lows.

Calling a market bottom is a fool's errand, but these stocks are as cheap as they've ever been. For investors able to stomach the volatility, buying shares of these industry leaders now -- while they're on sale -- could prove to be a profitable move down the road.