Dive into the Market: Analyzing the Impact of Fed’s Rate Cut Signal Dive into the Market: Analyzing the Impact of Fed’s Rate Cut Signal

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By Ronald Tech

On January 31, the Federal Reserve opted to maintain the benchmark lending interest rate at the current range of 5.25-5.5% during its January FOMC meeting.
However, to the disappointment of many market participants, the central bank made it clear that an interest rate cut in March was highly unlikely.

Fed Chairman Jerome Powell stated, “Based on the meeting today, I would tell you that I don’t think it’s likely that the committee will reach a level of confidence by the time of the March meeting to identify March as the time to do that. But that’s to be seen.”

Simultaneously, the post-FOMC statement omitted the section signaling that the central bank still held a tightening bias. This unambiguously indicates the conclusion of the rate hike regime that began in March 2022.

Powell added, “We believe that our policy rate is likely at its peak for this tightening cycle and that if the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year.”

Following the Fed’s decisions, Wall Street witnessed a sharp decline. The Dow dropped 0.8%, marking its worst day since December. The S&P 500 fell 1.6%, posting its worst day since September. The Nasdaq Composite plummeted 2.2%, recording its worst single-day performance since October.

Meltdown is a Temporary Phenomenon

The impressive bull run in the market is poised to continue in 2024. It is highly probable that the Fed will initiate a rate cut by no later than June. A lower interest rate environment will spur economic growth, accelerating business investment. In 2022, small-cap companies endured record-high inflation, a surging interest rate, and fears of an impending recession. However, in 2023, this segment found some relief from these three concerns, and a rate cut will further boost mid and small-sized enterprises.

A lower interest rate environment will benefit high-growth sectors like technology and consumer discretionary. Many companies in these spaces rely on inexpensive sources of credit to fully realize their business potential over an extended period. A lower risk-free interest rate will reduce the discount rate, thereby increasing the net present value of investments in these stocks.

The global supply-chain system has been gradually improving since last year as U.S. corporate giants restructure their supply-chain systems to bypass China. Moreover, the fundamentals of the U.S. economy remain robust despite record-high inflation and interest rates.

The Department of Commerce reported that the U.S. economy grew at a rate of 3.3% in the fourth quarter of 2023, well above the consensus estimate of 2%. The U.S. GDP rose 2.5% in 2023 compared with 1.9% in 2022. At the beginning of 2023, the consensus estimate for full-year GDP was 2%. The resilient labor market has shown some softness, but it has not collapsed, and personal consumption remains robust.

Finally, a preliminary estimate revealed that a massive $1.4 trillion flowed into U.S. money market funds primarily due to an extremely high interest rate environment, with cash yielding around 5%. A systematic decline in market interest rates will redirect a significant portion of these substantial funds to the equity markets.

Our Top Picks

In light of these developments, every dip in the market presents a compelling buying opportunity, even for stocks that soared in 2023 and exhibit strong potential for 2024 and beyond. At this juncture, several stocks appear attractive for future growth. However, employing the following four criteria will facilitate the selection process:

First, choose corporate giants (market capital > $40 billion) with a well-established business model and globally recognized brands. Second, seek stocks with robust growth potential for 2024 and beyond.

Third, opt for stocks that have witnessed positive earnings estimate revisions in the last 60 days. Fourth and most importantly, select stocks that boast a Zacks Rank #1 (Strong Buy). You can view the complete list of today’s Zacks #1 Rank stocks.

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The chart below illustrates the price performance of our five picks over the last three months.

Zacks Investment Research
Image Source: Zacks Investment Research

Netflix Inc. NFLX achieved a significant milestone by adding 13.12 million paid subscribers globally in the fourth quarter of 2023, accompanied by a 1% increase in average revenue per subscription. NFLX attributed its robust top-line growth to its paid subscription-sharing offering, recent price changes, and the strength of its overall business.

NFLX is expected to maintain its dominance in the streaming space, thanks to its diverse content portfolio stemming from substantial investments in the production and distribution of localized and foreign-language content.

Netflix has an expected revenue and earnings growth rate of 14.3% and 40.7%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved by 5.3% over the last seven days.

CrowdStrike Holdings Inc. CRWD is benefitting from the increasing demand for cybersecurity solutions due to a string of data breaches and the growing need for security and networking products amidst the burgeoning hybrid work trend. Continued digital transformation and cloud-migration strategies adopted by organizations are key growth drivers.

CRWD’s portfolio strength, particularly the Falcon platform’s 10 cloud modules, bolsters its competitive edge and helps expand its user base. Additionally, strategic acquisitions, such as Humio and Preempt, are expected to drive growth for CRWD.

CrowdStrike has an expected revenue and earnings growth rate of 28.2% and 23.6%, respectively, for the current year (ending January 2025). The Zacks Consensus Estimate for current-year earnings has improved by 0.3% over the last 30 days.

Arista Networks Inc. ANET develops, markets, and sells cloud networking solutions in the Americas, Europe, the Middle East, Africa, and the Asia-Pacific. ANET is benefitting from the expanding cloud networking market driven by robust demand for scalable infrastructure. The company has recently joined the Microsoft Intelligent Security Association.

Arista Networks continues to capitalize on solid momentum and diversification across its top verticals and product lines. It is well-positioned for growth in the data-driven cloud networking business, with proactive platforms and predictive operations. ANET introduced an enterprise-grade Software-as-a-Service offering for its flagship CloudVision platform.



Positive Indicators for Progressive Corp. and Shopify Inc.

Positive Indicators for Progressive Corp. and Shopify Inc.

Progressive Corp.’s Growth

Progressive Corp. (PGR) is on an upward trajectory with an expected revenue and earnings growth rate of 12.6% and 19.1%, respectively for the current year. Its compelling product portfolio and dominant position in the Vehicle and Property businesses are propelling the company forward. PGR’s focus on serving as a one-stop insurance destination, alongside advantageous home and auto insurance combinations, spells success. In addition, its competitive pricing strategies and innovative offerings are set to bolster policy life expectancy, and a healthy retention ratio bodes well for the company.

Shopify Inc.’s Growth

Shopify Inc. (SHOP) is experiencing a surge in its merchant base with an expected revenue and earnings growth rate of 19.1% and 49.2%, respectively for the current year. The company’s consistent efforts to attract merchants with offerings like Shop Pay and Shop Pay Installments are paying off. Furthermore, strategic partnerships with social media and online platforms such as YouTube, Twitter, Facebook, Instagram, and Google indicate a promising expansion of SHOP’s merchant base. The recent divestiture of its logistics business to Flexport is anticipated to drive profitability upward.