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Markets Anticipate Peaking Fed Rate Hikes: Growth ETFs to Gain
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The U.S. Consumer Prices Index for the month of June brought about a welcome relief for investors, with prices rising at their slowest annual pace since March 2021. Core inflation, excluding volatile food and gas costs, increased 4.8% over the last year, falling slightly below economists' expectations but still above Fed's 2% target. The data sparked a debate over whether future Fed rate hikes will at all be steep and whether the peak of the policy tightening is nearing.
July Rate Hike Sanguine, But Uncertainty Lingers for September and Beyond
Despite slower inflation growth, a 25-basis point interest rate hike on Jul 26 is almost certain, given the sticky inflation and tightening labor market. However, the focus now shifts to the subsequent meetings and the potential for further rate increases.
Futures markets are pricing in a 27% chance of a 50-basis point rate hike by the end of November, indicating a shift in expectations. Economists at Citi suggest that while a July hike is probable, a September increase might be shifted back to November due to cooling inflation, as quoted on yahoo Finance.
Richmond Fed President Thomas Barkin emphasized the need for concrete evidence of a sustained decrease in inflation. Economists suggest that the final decline in inflation may take longer than the initial decline over the past year.
A Long Road Ahead for Rate Cuts?
Many market experts and analysts believe that a timely and steady return to the Fed’s inflation target of 2% is far from sure. As a result, rate cuts remain distant, and the underlying trend in inflation is expected to remain closer to 3% rather than the desired 2%.
Why Growth ETFs Are Likely to Rally
A 3% inflation rate and a Fed pause are enough to boost the growth stocks. Traditionally, growth ETFs have performed well in periods of low interest rates as the borrowing costs for companies stay low, enabling them to invest in expansion and innovation. The cues of cooling inflation and lower risk of an aggressive rate-hike cycle should bode well for growth investing. Moreover, the segment suffered a lot in 2022.
We have highlighted top-ranked growth ETFs that are still cheaper in valuation as the investing backdrop is still edgy.
The underlying S&P 500 Growth Index measures the performance of the large capitalization growth sector of the U.S. equity market. The fund charges 18 bps in fees.
The underlying NASDAQ Composite TR USD is the market capitalization-weighted index of over 3,300 common equities listed on the Nasdaq stock exchange. The fund charges 79 bps in fees.
The underlying S&P 500 Growth Index measures the performance of the large-capitalization growth sector in the U.S. equity market. The fund charges 4 bps in fees.
Invesco Dynamic Large Cap Growth ETF (PWB - Free Report) – Zacks Rank #2; P/E: 24.36X
The underlying Dynamic Large Cap Growth Intellidex Index is designed to provide capital appreciation while maintaining consistent stylistically accurate exposure. The fund charges 55 bps in fees.
Image: Bigstock
Markets Anticipate Peaking Fed Rate Hikes: Growth ETFs to Gain
The U.S. Consumer Prices Index for the month of June brought about a welcome relief for investors, with prices rising at their slowest annual pace since March 2021. Core inflation, excluding volatile food and gas costs, increased 4.8% over the last year, falling slightly below economists' expectations but still above Fed's 2% target. The data sparked a debate over whether future Fed rate hikes will at all be steep and whether the peak of the policy tightening is nearing.
July Rate Hike Sanguine, But Uncertainty Lingers for September and Beyond
Despite slower inflation growth, a 25-basis point interest rate hike on Jul 26 is almost certain, given the sticky inflation and tightening labor market. However, the focus now shifts to the subsequent meetings and the potential for further rate increases.
Futures markets are pricing in a 27% chance of a 50-basis point rate hike by the end of November, indicating a shift in expectations. Economists at Citi suggest that while a July hike is probable, a September increase might be shifted back to November due to cooling inflation, as quoted on yahoo Finance.
Richmond Fed President Thomas Barkin emphasized the need for concrete evidence of a sustained decrease in inflation. Economists suggest that the final decline in inflation may take longer than the initial decline over the past year.
A Long Road Ahead for Rate Cuts?
Many market experts and analysts believe that a timely and steady return to the Fed’s inflation target of 2% is far from sure. As a result, rate cuts remain distant, and the underlying trend in inflation is expected to remain closer to 3% rather than the desired 2%.
Why Growth ETFs Are Likely to Rally
A 3% inflation rate and a Fed pause are enough to boost the growth stocks. Traditionally, growth ETFs have performed well in periods of low interest rates as the borrowing costs for companies stay low, enabling them to invest in expansion and innovation. The cues of cooling inflation and lower risk of an aggressive rate-hike cycle should bode well for growth investing. Moreover, the segment suffered a lot in 2022.
We have highlighted top-ranked growth ETFs that are still cheaper in valuation as the investing backdrop is still edgy.
ETFs in Focus
iShares S&P 500 Growth ETF (IVW - Free Report) – Zacks Rank #2 (Buy); P/E: 23.20X
The underlying S&P 500 Growth Index measures the performance of the large capitalization growth sector of the U.S. equity market. The fund charges 18 bps in fees.
Fidelity Nasdaq Composite Index ETF (ONEQ - Free Report) – Zacks Rank #2; P/E: 24.79X
The underlying NASDAQ Composite TR USD is the market capitalization-weighted index of over 3,300 common equities listed on the Nasdaq stock exchange. The fund charges 79 bps in fees.
SPDR Portfolio S&P 500 Growth ETF (SPYG - Free Report) – Zacks Rank #2; P/E: 22.75X
The underlying S&P 500 Growth Index measures the performance of the large-capitalization growth sector in the U.S. equity market. The fund charges 4 bps in fees.
Invesco Dynamic Large Cap Growth ETF (PWB - Free Report) – Zacks Rank #2; P/E: 24.36X
The underlying Dynamic Large Cap Growth Intellidex Index is designed to provide capital appreciation while maintaining consistent stylistically accurate exposure. The fund charges 55 bps in fees.
Vanguard S&P 500 Growth ETF (VOOG - Free Report) – Zacks Rank #2 P/E: 23.40X
The underlying S&P 500 Growth Index measures the performance of large-capitalization growth stocks. The fund charges 10 bps in fees.