The Federal Reserve sent broader markets lower on Wednesday as it delivered a small rate hike, but it also hinted at a potential pause, which could be positive. Though the 25 basis points hike may not be officially the last one, I believe the Fed could soon be ready to wrap up its fight against scorching-hot levels of inflation.
A pause on the rate-hike front may be good news for tech stocks, which have imploded at the hands of last year's series of interest rate increases. While it's way too early in the game to conclude that the Fed is pivoting, and it has not said that it is opening the door to cuts, I do think that some of the tech stocks that have bled out the most in 2022 may begin to start inching higher again amid speculation that the worst is behind us.
Why a Fed pause may be in sight
With markets caught between hefty inflation and a nearing recession, things could certainly take a turn for the worst over the coming weeks and months. We've heard a handful of market strategists calling for some sort of pullback or correction.
Nobody knows for sure when a correction will happen. However, I do know it's always a good idea to have a plan for when a correction does hit. Thus far, 2023 has been a relief year for portfolios. More twists and turns should be expected, though, even if the Fed now has the means to back off with its aggressive rate hikes as inflation cools.
Tech stocks dragged the indices lower last year, but this year is a different story. They've been the heroes this time around. Big tech has had the most influence, with Apple (AAPL, Financial) and Meta Platforms (META, Financial) doing their part to give a lift to the S&P 500 and Nasdaq 100 exchanges.
As the rally in these mega-cap tech stocks begins to cool, I think we could witness new leaders emerge. My guess is that some of the tech stocks that were hit hard by rate hikes due to their unprofitability and high debt amid rising interest rates could begin to pull their own weight again. One stock in particular that I have my eye on is Snowflake (SNOW, Financial).
Snowflake
Snowflake is a data warehousing and data lake software company that's really dragged its feet since its enthusiasm peak shortly after its 2020 IPO. Snowflake's services also go beyond just warehousing solutions. I like to think of it as a "data as a service" (DaaS) company that has a sizeable runway for growth as more corporations look to put their data sets to work for them.
Unlike most other software as a service (SaaS) companies, Snowflake uses a usage-based model. If its clients aren't using its offerings as much in any given quarter, Snowflake will feel the sting. With macro headwinds pushing companies to reduce their spending, Snowflake faces a dampener on its growth in the near-term.
Looking further out, I view Snowflake as a generational growth company that will profit from the rise of big data analytics and artificial intelligence (AI). The company recently launched its manufacturing data cloud, which aims to help companies improve the performance of their supply chains. As companies look to optimize their supply chains and operations after the disruptive Covid-19 crisis, I do think Snowflake's latest data cloud offering could be a hit, even if a minor recession is in the cards.
The way I see it, companies that aren't tapping into their data for insights could be put at a disadvantage to peers that are. As new AI technologies help make it easier extract value from large amounts of data, I'd look for Snowflake's growth rate to re-accelerate on the back of new innovations and an increased appetite for cutting-edge technologies like AI.
OpenAI likely opened the floodgates to the AI and big data markets, and Snowflake is likely to be a major beneficiary as more companies become willing to experiment with new technologies to gain an edge over their rivals.
Final thoughts
With a rate pause potentially in sight, we may very well hear folks talking about rate cuts. It's hard to tell what the Fed will have up its sleeves at the next meeting. In any case, it certainly feels like most of the pain has already been felt in my opinion. Sure, more banks could break, and various companies may see rates really hurt their earnings again. Regardless, I believe the tech sector seems ripe with intriguing options for fearless investors with strong stomachs seeking value in the beaten-down tech space.
Snowflake used to be the hyper-growth stock to chase. Nowadays, it's been range-bound (flying around $150 per share). As macro headwinds dissipate and the Fed rate hikes reach the beginning of the end, I'd look for such battered hyper-growth innovators to be next to step up to the plate.
