All eyes were on the much-anticipated Federal Open Market Committee (FOMC) statement yesterday, and it didn’t really tell much that Wall Street didn’t already know: The central bank would keep key interest rates at or near zero for now, but it maintained that it would begin hiking interest rates in mid-March after the Fed had finished unwinding its quantitative easing program. This interest rate hike would be the first time the Fed has raised rates since December 2018.
The FOMC statement noted, “With inflation well above 2 percent and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate.”
The Fed said it would reduce its bond-buying to $30 billion in February, and potentially end the bond purchases in March as it plans to hike interest rates by a quarter-percentage point. The FOMC also released a statement the set out its “…principles for reducing the size of the balance sheet,” which has soared to nearly $9 trillion. The committee said it would start reducing that balance sheet after its planned rate hikes start.
You may recall that in December the FOMC indicated it would carry out three, quarter-percentage point increases this year.
Wall Street seemed fine with the statement, as the broader market rallied shortly after its release. However, the stock market slipped lower once Fed Chairman Jerome Powell’s press conference got underway. He said that inflation “…has not gotten better. It has probably gotten a bit worse… To the extent that situation deteriorates further, our policy will have to reflect that.” Consumer prices are increasing at a 7% annual rate, the highest level since the 1980s.
Powell also added that “I think there’s quite a bit room to raise interest rates without threatening the labor market.”
Importantly, Powell made it very clear at the press conference that the Fed can only do so much to tame inflation because rates remain near zero in major economies around the world.
It’s why the dollar has been soaring lately, and why foreign buyers account for about 70% of purchases of U.S. Treasuries. So, the Fed will only be able to raise rates so far because if they overstep, they could invert the yield curve and hurt financials.
So, as investors, what do we do now?
The answer certainly isn’t to get out of the market, but rather to invest in fundamentally superior growth stocks. As I’ll explain in my Growth Investor February Monthly Issue tomorrow, these stocks will serve as an oasis for the stock market. The fact of the matter is the fundamentally superior stocks, like the ones I own in Growth Investor, should bounce like “fresh tennis balls,” while many other stocks will bounce like “rocks.”
STX Surges on Stunning Earnings Report
Take Seagate Technology Holdings (STX), for example. The company has been at the forefront of the massive data storage solutions sector for more than 40 years.
Like many leading tech companies, it got swept up in the manic tech selloff at the beginning of the year. But strong earnings results helped it rebound strongly today.
Wednesday afternoon, the company said it achieved its highest revenue in more than six years in its second quarter in fiscal year 2022. The company noted that it received strong cloud data center demand, which helped deliver second-quarter revenue of $3.12 billion. That represented 19% year-over-year revenue growth and topped estimates for $3.11 billion.
Seagate Technology also reported second-quarter earnings of $2.41 per share, which was up 87% from $1.29 per share in the second quarter of 2021. Analysts were expecting second-quarter earnings of $2.36 per share, so STX posted a 2.1% earnings surprise.
Investors poured into the stock on the news, sending shares up as high as 20% this morning.
The reality is the fourth-quarter earnings announcement season is forcing all investors to “think.” Since my Growth Investor Buy Lists are chock-full of smart stocks that will be posting better-than-expected sales and earnings, as well as issuing positive guidance, I am expecting an impressive rebound.
According to FactSet, S&P 500 companies are expected to post an average 21.8% earnings growth and 12.9% revenue growth for the fourth quarter. FactSet anticipates the S&P 500’s earnings to increase more than 25% for the fourth quarter in a row. By comparison, the average Growth Investor stock is characterized by 33.4% annual sales growth and 45.6% annual sales growth.
The S&P 500 is trading at 22 times forecasted price-to-earnings (PE), while our average Growth Investor stock is trading at a median forecasted PE in 2022 of 20.3. In other words, thanks to the recent correction, the average Growth Investor stock is no longer trading at a premium forecasted PE ratio.
I should add that in the past three months, the analyst community has revised their consensus earnings estimate up 12.1% higher. This is a very good sign, since positive earnings revisions typically precede future earnings surprises.
The bottom line: I am counting on the fourth-quarter sales and earnings announcements to drop kick and drive our Growth Investor stocks higher.
If you’re looking to shore up your portfolio with fundamentally superior stocks, my Growth Investor stocks are a great place to start. They have strong fundamentals to drive them higher, regardless of where the broader market turns or what the Fed’s next moves are.
If you sign up now, you’ll be just in time for my Growth Investor February Monthly Issue. I’ll be releasing my latest Monthly Issue tomorrow afternoon. Not only will I explain why I expect my Growth Investor Buy List stocks to bounce back, but I’ll reveal three new stock recommendations – one that’s in the electric vehicle (EV) sector and two dividend growth stocks. I’ll also share my latest Top 5 Stocks list. If you’re interested, click here to join now.
The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owns the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below:
Microsoft Corporation (MSFT), Seagate Technology Holdings (STX)