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Interest Rate Cuts on the Horizon: 3 Stocks Primed to Benefit
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With inflation easing, and both the economy and labor market remaining robust, the macroeconomic picture is enjoying some long-awaited clarity. Now that economists are beginning to expect a more regular economic picture, investors can soon expect interest rates to regulate as well.
The Federal Reserve pushed interest rates up by 500 basis points, in the fastest rate hiking cycle in the central bank’s history, as extinguishing rampant inflation became mission critical. But now that those pressures have eased so too can monetary policy.
Over the last few weeks investors have clearly adopted a narrative accepting the possibility of rate cuts happening sooner rather than later. Based on the federal funds futures market, traders have been pricing in rising odds of the first interest rate cut occurring in the first half of 2024.
In the chart below, from the CME Group’s Fed Watch tool, we can see the odds of a May rate cut have risen from 35% a month ago to 49% today.
Image Source: CME Group
Implications of Rate Cuts
Of course, the rate of interest targeted by the US central bank is one of, if not the most important factor influencing markets. However, the primary levers being pulled are relatively straightforward.
Lower interest rates mean cheaper credit and more free-flowing liquidity. It also means that investors will be pushed farther out on the risk-curve, seeking higher returns from more speculative investments. This leads them into growth-oriented stocks, and also causes multiple expansion, likely pushing this group of stocks higher.
All of this is very bullish, and I think that the mid-cap technology sector may be one of the major beneficiaries of this evolving market environment.
Upwork
Upwork(UPWK - Free Report) is an online platform that connects businesses and individuals with freelance professionals and remote workers. Founded in 2015, Upwork offers a wide range of freelancers across various fields, including web development, design, writing, and marketing, making it a valuable resource for businesses seeking specialized talent on a project-by-project basis. The platform allows clients to find, hire, and collaborate with freelancers, making it a popular choice for companies looking to access flexible and skilled workforce solutions.
Upwork has seen some significant upgrades to its FY23 earnings estimates, giving it a Zacks Rank #1 (Strong Buy) rating. FY23 earnings estimates have increased by 30% in the last month, and are forecast to climb from -$0.06 to $0.48 YoY.
Image Source: Zacks Investment Research
Upwork stock has also formed a convincing bottoming pattern this year and looks to be building a technical momentum setup. If UPWK price can break out above the $14.75 level, it should rally to new 18-month highs.
Additionally, Upwork is trading at a forward earnings multiple of 30x, which when compared to its EPS growth forecasts is relatively cheap.
Image Source: TradingView
CrowdStrike
CrowdStrike(CRWD - Free Report) is a cybersecurity company known for its cloud-native endpoint protection platform. Founded in 2011, CrowdStrike provides advanced cybersecurity solutions that help organizations detect, prevent, and respond to cyber threats and attacks in real-time.
Its platform uses artificial intelligence and machine learning to protect endpoints and endpoints such as computers, servers, and mobile devices from various forms of cyber threats, making it a prominent player in the cybersecurity industry.
Sales and earnings at CrowdStrike are expected to grow at a blistering pace, with annual sales growth forecasts at 35% and EPS at 83%. CrowdStrike also enjoys a Zacks Rank #2 (Buy) rating, reflecting upward trending earnings revisions.
Image Source: Zacks Investment Research
CrowdStrike stock has been leading the sector higher all year, and just today blasted 10% higher after breaking out from a bull flag last week.
Image Source: TradingView
Cloudflare
Cloudflare(NET - Free Report) is a global technology company that provides a wide range of cloud-based services to enhance the security, performance, and reliability of websites and online applications. Founded in 2009, Cloudflare offers services such as content delivery, DDoS protection, web application firewall, and domain name system (DNS) management.
These services help businesses improve the speed and security of their online presence while mitigating threats and ensuring uptime. Cloudflare is widely recognized for its role in optimizing and safeguarding websites and applications across the internet.
Cloudflare too has impressive growth estimates, with annual sales expected to climb 32% this years and EPS to grow over 250% YoY. Analysts have not missed this powerful trend and have unanimously raised earning estimates for the cyber security firm.
Image Source: Zacks Investment Research
Momentum has been strongly favoring NET stock as it too pushed to new YTD highs today. After breaking out from a broader year long consolidation, the stock is forming and breaking out from minor bull flags as seen this week.
Image Source: TradingView
Bottom Line
As the market continues to accept the now shifting interest rate regime, it is likely that we will see further bull runs, especially in the high-growth, mid-cap technology sector.
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Interest Rate Cuts on the Horizon: 3 Stocks Primed to Benefit
With inflation easing, and both the economy and labor market remaining robust, the macroeconomic picture is enjoying some long-awaited clarity. Now that economists are beginning to expect a more regular economic picture, investors can soon expect interest rates to regulate as well.
The Federal Reserve pushed interest rates up by 500 basis points, in the fastest rate hiking cycle in the central bank’s history, as extinguishing rampant inflation became mission critical. But now that those pressures have eased so too can monetary policy.
Over the last few weeks investors have clearly adopted a narrative accepting the possibility of rate cuts happening sooner rather than later. Based on the federal funds futures market, traders have been pricing in rising odds of the first interest rate cut occurring in the first half of 2024.
In the chart below, from the CME Group’s Fed Watch tool, we can see the odds of a May rate cut have risen from 35% a month ago to 49% today.
Image Source: CME Group
Implications of Rate Cuts
Of course, the rate of interest targeted by the US central bank is one of, if not the most important factor influencing markets. However, the primary levers being pulled are relatively straightforward.
Lower interest rates mean cheaper credit and more free-flowing liquidity. It also means that investors will be pushed farther out on the risk-curve, seeking higher returns from more speculative investments. This leads them into growth-oriented stocks, and also causes multiple expansion, likely pushing this group of stocks higher.
All of this is very bullish, and I think that the mid-cap technology sector may be one of the major beneficiaries of this evolving market environment.
Upwork
Upwork (UPWK - Free Report) is an online platform that connects businesses and individuals with freelance professionals and remote workers. Founded in 2015, Upwork offers a wide range of freelancers across various fields, including web development, design, writing, and marketing, making it a valuable resource for businesses seeking specialized talent on a project-by-project basis. The platform allows clients to find, hire, and collaborate with freelancers, making it a popular choice for companies looking to access flexible and skilled workforce solutions.
Upwork has seen some significant upgrades to its FY23 earnings estimates, giving it a Zacks Rank #1 (Strong Buy) rating. FY23 earnings estimates have increased by 30% in the last month, and are forecast to climb from -$0.06 to $0.48 YoY.
Image Source: Zacks Investment Research
Upwork stock has also formed a convincing bottoming pattern this year and looks to be building a technical momentum setup. If UPWK price can break out above the $14.75 level, it should rally to new 18-month highs.
Additionally, Upwork is trading at a forward earnings multiple of 30x, which when compared to its EPS growth forecasts is relatively cheap.
Image Source: TradingView
CrowdStrike
CrowdStrike (CRWD - Free Report) is a cybersecurity company known for its cloud-native endpoint protection platform. Founded in 2011, CrowdStrike provides advanced cybersecurity solutions that help organizations detect, prevent, and respond to cyber threats and attacks in real-time.
Its platform uses artificial intelligence and machine learning to protect endpoints and endpoints such as computers, servers, and mobile devices from various forms of cyber threats, making it a prominent player in the cybersecurity industry.
Sales and earnings at CrowdStrike are expected to grow at a blistering pace, with annual sales growth forecasts at 35% and EPS at 83%. CrowdStrike also enjoys a Zacks Rank #2 (Buy) rating, reflecting upward trending earnings revisions.
Image Source: Zacks Investment Research
CrowdStrike stock has been leading the sector higher all year, and just today blasted 10% higher after breaking out from a bull flag last week.
Image Source: TradingView
Cloudflare
Cloudflare (NET - Free Report) is a global technology company that provides a wide range of cloud-based services to enhance the security, performance, and reliability of websites and online applications. Founded in 2009, Cloudflare offers services such as content delivery, DDoS protection, web application firewall, and domain name system (DNS) management.
These services help businesses improve the speed and security of their online presence while mitigating threats and ensuring uptime. Cloudflare is widely recognized for its role in optimizing and safeguarding websites and applications across the internet.
Cloudflare too has impressive growth estimates, with annual sales expected to climb 32% this years and EPS to grow over 250% YoY. Analysts have not missed this powerful trend and have unanimously raised earning estimates for the cyber security firm.
Image Source: Zacks Investment Research
Momentum has been strongly favoring NET stock as it too pushed to new YTD highs today. After breaking out from a broader year long consolidation, the stock is forming and breaking out from minor bull flags as seen this week.
Image Source: TradingView
Bottom Line
As the market continues to accept the now shifting interest rate regime, it is likely that we will see further bull runs, especially in the high-growth, mid-cap technology sector.