Another Soft Inflation Report, Another Reason to Buy Tech Stocks

By TradeSmith Research Team

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Editor’s Note: Today we’re sharing an essay from tech analyst Luke Lango. Luke is a Caltech alum and economist who has identified many up-and-coming growth stocks well before they were household names, like Advanced Micro Devices, Shopify, Tesla, NIO, and Chegg. Below, he discusses how the latest inflation reports set up tech stocks for a summer surge.

Another day, another soft inflation report, another reason to buy tech stocks.

That’s how things seem to be going these days.

Last Wednesday, we learned that consumer price inflation continued to moderate in April, and it appears on track to get back to “normal” within a few months. As a result, tech stocks rallied.

The following day, we learned that producer price inflation also continued to moderate in April and is actually already back to “normal.” And tech stocks are rallying once again.

This has been the theme all year long.

Inflation dropped in January, February, and March. And it dropped again in April.

As inflation has fallen every single month in 2023, tech stocks have rallied. Year-to-date, the Nasdaq Composite is up an impressive 18%, marking one of its best starts to a year ever.

Fed Pauses Lead Tech Stocks to Rally

It fundamentally makes sense.

Tech stocks are long-duration assets. Their valuations are particularly sensitive to interest rates, which are determined by inflation. When inflation goes up, interest rates go up, and tech stock valuations go down.

Conversely, when inflation goes down, interest rates go down, and tech stock valuations go up.

To be sure, interest rates aren’t declining yet. The Fed is still hiking rates. But markets are forward-looking — they are discounting mechanisms for the future. And with inflation falling, the market is now predicting 90% odds of a Fed pause in June and 50% odds of a rate cut by July.

In other words, lower inflation is here, and lower rates are on the way. That’s why the tech sector is rallying.

And it will likely keep rallying.

We analyzed how tech performed after every “Fed pause” over the past 50 years. Every time, those stocks rallied.

Let me repeat that.

After every Fed pause of the past 50 years, tech stocks rallied over the next 12 months.

Typically, the rallies weren’t small. The average 12-month return was about 26%.

The Final Word

Let’s connect the dots here…

Inflation is falling rapidly, so traders are pricing in a 90% chance the Fed pauses its rate-hike campaign next month.

Historically speaking, every single time the Fed pauses a rate-hike campaign, tech stocks rally by about 26% over the following 12 months.

As we said at the top of this issue: Another day, another soft inflation report, another reason to buy tech stocks.

We want you to be in position to buy this summer’s biggest potential winners.