Growth stocks fight back: is it time to buy?

Tech stocks and other growth plays are down sharply in 2022, but the Nasdaq’s biggest rally in over two years shows there are opportunities for nimble investors.

Netflix and Tesla are driving an unexpected improvement in Nasdaq fortunes after the tech-focused index rallied around 13% in the period between two big US rate hikes.

This includes last night‘s 4% surge - the Nasdaq’s biggest one-day rally since April 2020 and the biggest on a Fed decision day since 2008. It followed remarks from Federal Reserve chair Jay Powell that were taken by traders as a sign that the worst of the monetary tightening may soon be over following the pain of back-to-back increases of 0.75% this summer.

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The first of these hikes took place on 15 June, and stock markets hit their lows a day later. Since then, investors have jumped back into many tech-focused stocks at prices significantly lower than the start of the year.

Whether this represents the start of a full recovery or is just a bear market rally, only time will tell. But it provides evidence as to why investors need to stay on their toes and be aware of opportunities, including in these recessionary times.

Nasdaq’s best-performing stocks

For bargain hunters, there’s been no better pick than Netflix (NASDAQ:NFLX) as its shares have rebounded by 30% in the past six weeks as recent results allayed some of Wall Street’s Peak Netflix fears.

Its loss of one million subscribers in the second quarter was much better than the two million forecast in April, when traders slashed their forecasts for subscriber numbers across 2022. Star fund manager Bill Ackman unwound his recently built position soon after that April update, taking an estimated $400 million hit in the process.

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Netflix shares are still 50% lower so far this year, but the robust second quarter update, and others from the likes of Google owner Alphabet in recent days, have gone some way to banishing the worst-case scenarios built into many valuations.

Other popular stocks where new investors are sitting on big profits since mid-June include Tesla (NASDAQ:TSLA) and Apple (NASDAQ:AAPL) after gains of 29% and 21% respectively. For longer-term investors, however, the pair are still 22% and 12% lower this year after the Nasdaq plunged into bear market territory with a peak-to-trough decline of well over 20%.

Nasdaq 100 top 10 since 16 June

Why have growth shares struggled this year?

Tech and growth stocks have been hit hard because their valuations are built around future cash flows, which become much less attractive as interest rates rise. Investors are also increasingly concerned that higher rates will tip the US economy into recession.

Rates went up another 0.75% last night to a range of 2.25% and 2.5% as inflation of 9.1% causes the Federal Reserve to tighten policy at the fastest pace since the 1990s.

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Powell warned of another “unusually large” rate increase at September’s meeting, but his other comments appeared to suggest the front-loading of rate hikes will then be over.

Futures markets scaled back the implied level of hikes for 2022 by around 10 basis points and now point to rates ending the year at around 3.25%. Ten-year US Treasury yields ended the day flat at below 2.8%, while two-year yields dropped slightly.

The S&P 500 was more than 2.5% higher and the Nasdaq experienced its best session since April 2020 as investors also welcomed reassuring results from tech giants Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOGL) after this week’s Walmart (NYSE:WMT) profit warning.

Second-quarter reporting season so far

UBS Global Wealth Management said the second-quarter reporting season in the US has been consistent with “growth slowing but not sinking” after 75% of firms topped earnings forecasts. About half of companies by market value have released results so far.

However, UBS told clients today that it thinks a sustained improvement in sentiment is unlikely until the Federal Reserve sees enough evidence of ebbing inflation to confirm that an end to the rate rises is in sight.

It added: “The pace of rate hikes will remain contingent on how swiftly inflation moderates, but given that recent growth data has been softening, this gave the market confidence that an inflection point in Fed policy may be drawing closer.”