This Stock Market Indicator Says the S&P 500 Is Headed Higher: 2 Growth Stocks to Buy Now Before the Rally

To squash inflation, the Federal Reserve increased the benchmark federal funds rate by 525 basis points since March 2023, the fastest series of rate hikes since the 1980s. That aggressive monetary policy has paid off. Inflation cooled sharply over the last 16 months, so much so that the futures market is signaling an end to the rate hike cycle, according to CME Group's FedWatch Tool.

Now what? The Fed has led six other rate hike cycles since 1988, and the S&P 500 returned an average of 23.7% during the 12-month period immediately following those events, according to data from Morningstar. In other words, if the current rate hike cycle has indeed ended, history says the S&P 500 -- a benchmark for the broader U.S. stock market -- could climb about 24% in the next year.

Here are two growth stocks to buy before the rally.

1. HubSpot

Building good customer relationships is a vital part of any business, and every interaction is an opportunity to delight or disappoint prospective buyers. HubSpot (HUBS -0.78%) helps businesses tackle that imperative with its customer relationship management (CRM) platform, a suite of productivity software that empowers marketing, sales, service, and operations teams to attract, engage, and retain customers.

HubSpot trails CRM rivals Salesforce and Microsoft in overall market share, but it has still achieved a significant market presence due to its somewhat unique strategy.

Whereas Salesforce relied heavily on acquisitions, HubSpot generally developed its products internally to ensure seamless integration. The company also employs a freemium pricing strategy that allows businesses to graduate from free to paid product tiers as their needs evolve.

The combination of easy-to-use software and attractive pricing has made HubSpot particularly popular with small and mid-market businesses (SMBs). In fact, its market presence and user satisfaction scores are so high among SMBs that HubSpot was recognized by research firm G2 as the best global software company in any category in 2023.

HubSpot reported solid financial results in the second quarter, beating expectations on the top and bottom lines. Its customer count increased 23% to 184,900, and the average subscription revenue per customer ticked higher by 2%. In turn, revenue rose 25% to $529 million and non-GAAP (adjusted) earnings soared 205% to $1.34 per diluted share.

Looking ahead, HubSpot is well-positioned to maintain its growth trajectory. Management values its addressable market at $72 billion by 2027, and the company has made a habit of adding new tools and capabilities to its CRM platform.

For instance, HubSpot recently launched two generative artificial intelligence products that automate various tasks to streamline marketing, sales, and customer service.

Currently, shares trade at 12.1 times sales, a discount to the three-year average of 17.4 times sales. That is a reasonable price to pay for this growth stock.

2. Etsy

Etsy (ETSY 0.34%) operates a family of e-commerce marketplaces, including Elo7 for Brazilian handmade goods, Depop for fashion resale, and Reverb for musical instruments. But the company is best known for its namesake Etsy marketplace, a digital shopping destination synonymous with vintage, artisanal, and often customizable goods.

Etsy's focus on non-commoditized products is somewhat unique among retailers of scale, and while its marketplace may not be a perfect fit for every occasion, its strategy is still resonating with consumers. Etsy is the eighth most popular online marketplace worldwide and the fourth most popular online marketplace in the U.S.

Nevertheless, the company reported mixed results in the second quarter. Gross merchandise sales (GMS) slipped 1% and GMS per active buyer dropped 6% as consumers continued to battle high inflation. Yet revenue rose 7% to $629 million on strong merchant adoption of advertising services. But net income under generally accepted accounting principles (GAAP) fell 12% to $0.45 per diluted share as the company continued to invest aggressively in product development.

On the bright side, Etsy is poised to accelerate growth in the future, especially as economic conditions normalize. The company already has a strong foothold in a market that management values at $466 billion, but Etsy is leaning into artificial intelligence to better engage buyers with more relevant search results and product recommendations. CEO Josh Silverman says that could "unlock an enormous amount of growth in the years ahead."

Currently, the stock trades at 4.1 times sales, its cheapest valuation in more than five years. The creates a compelling buying opportunity for patient investors. As always, it would be prudent to start with a small position and add more shares over time.