The Federal Reserve began raising its benchmark interest rate in March 2022. Policymakers pushed that rate higher at its fastest pace since the early 1980s in an effort to bring inflation back to its 2% target. They have nearly hit that mark. The inflation reading was 3.1% in November 2023, a significant slowdown from 9.1% in June 2022.
Given that progress, the Fed held rates steady at the last three meetings, and officials have signaled an end to the rate hike cycle this year. In fact, the latest projections imply a few rate cuts in 2024. In any case, the end of a rate hike cycle has historically been a good thing for the S&P 500 (SNPINDEX: ^GSPC), a benchmark for the broader U.S. stock market.
Here's what investors should know.
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History says the stock market is headed higher
The Federal Reserve has guided the economy through 10 complete rate hike cycles in the last 50 years. The S&P 500 moved higher 80% of the time during the 12-month period following the last hike in those cycles, and the index returned a median of 16.1% during those periods.
For context, policymakers last raised the benchmark rate on July 27, since which time the S&P 500 has advanced 3.7%. That leaves an implied upside of roughly 12% through July 2024, provided the index performs in line with its historical average.
As a caveat, past returns are never a guarantee of future results. Each rate hike cycle during the last 50 years was caused by different circumstances, so the current one could play out very differently. However, the S&P 500 has returned about 10% annually over the long term, so now is a good time to buy stocks no matter what happens in the next 12 months.
Investors can find inspiration in recent stock splits
Investors looking for places to put their money should consider the many popular companies that have split their stocks somewhat recently, as detailed below:
- Amazon: 20-for-1 split in June 2022.
- Apple: 4-for-1 split in August 2020.
- Arista Networks: 4-for-1 split in November 2021.
- Alphabet: 20-for-1 split in July 2022.
- Dexcom: 4-for-1 split in June 2022.
- Monster Beverage: 2-for-1 split in March 2023.
- Nvidia: 4-for-1 split July 2021.
- Palo Alto Networks: 3-for-1 split in September 2022.
- Shopify (SHOP 1.11%): 10-for-1 split in June 2022.
- Tesla: 3-for-1 split in August 2022.
- The Trade Desk: 2-for-1 split in June 2021.
Stock splits generally follow lasting share price appreciation, which rarely happens in the absence of solid business fundamentals. In that way, stock splits can help investors identify good companies. While a case could be made for every stock listed above, Shopify looks attractive at its current valuation.
Shopify is a leader in commerce software
Shopify reported stellar financial results in the third quarter. Revenue increased 25% to $1.7 billion due to the onboarding of larger merchants, strong momentum across Europe, and price increases. The company also reported generally accepted accounting principles (GAAP) net income of $708 million, up from a net loss of $188 million in the prior year. The driving forces behind improved profitability were the sale of its capital-intensive logistics business and workforce reductions.
The investment thesis for Shopify centers on its ability to simplify commerce and support the entire merchant lifecycle, from start-up to enterprise. Its software unifies physical and digital sales channels behind a common dashboard. That means merchants can manage their businesses across online marketplaces, social media networks, branded websites, and brick-and-mortar shops from a single platform.
Additionally, Shopify provides supplemental services that help merchants grow their businesses. That includes financial services like payment processing, working capital loans, and business bank accounts, as well as services for cross-border commerce and wholesale. Shopify also simplifies logistics by linking merchants with freight and fulfillment providers like Flexport and Amazon. Indeed, merchants can now offer "Buy with Prime" at checkout, a service that extends the shipping benefits of Prime membership beyond the Amazon marketplace.
Here's the bottom line: No other commerce platform offers the same breadth of functionality, and Shopify has earned a leadership position in e-commerce and omnichannel commerce software. In turn, that success has attracted a partner ecosystem that is four times larger than its closest competitor, creating a network effect that further solidifies its market leadership.
To elaborate, Shopify has more developers and technology partners building products for its app store, which continuously extends the functionality of its platform. It also has more systems integrators and consulting partners selling its software. Both advantages ultimately bring more merchants to Shopify, which further incentivizes participation in its partner ecosystem, creating a virtuous cycle.
The upshot is that Shopify is ideally positioned to benefit as e-commerce becomes more prevalent across both retail and wholesale channels. To quantify that, retail e-commerce sales are forecast to increase by 8% annually through 2030, while wholesale e-commerce sales are projected to increase by 19% annually through 2031. That points to mid-teens or even high-teens sales growth through the end of the decade.
Given that growth trajectory, Shopify's current valuation of 13.9 times sales seems reasonable, especially when the three-year average is 23.7 times sales. Patient investors willing to hold the stock for five years should feel confident buying a small position today. That is true regardless of what the S&P 500 does over the next 12 months.
