What Happened?
A number of stocks fell in the morning session after markets pulled back as a hotter-than-expected wholesale inflation report for July dampened hopes for a Federal Reserve interest rate cut. The U.S. Producer Price Index (PPI), a key measure of wholesale inflation, rose 0.9% month-over-month in July, far exceeding the 0.2% increase that economists had predicted. Annually, prices at the wholesale level jumped 3.3%, also surpassing the 2.5% forecast. This hotter-than-expected data has poured cold water on widespread expectations for an interest rate cut from the Federal Reserve next month. Persistent inflation makes it less likely for the central bank to ease monetary policy. Sectors with high-growth stocks, such as SaaS, are particularly sensitive to interest rate changes, as the prospect of higher rates for longer can diminish the present value of their future earnings, leading to a decline in stock prices.
The stock market overreacts to news, and big price drops can present good opportunities to buy high-quality stocks.
Among others, the following stocks were impacted:
- Advertising Software company PubMatic (NASDAQ: PUBM) fell 3.5%. Is now the time to buy PubMatic? Access our full analysis report here, it’s free.
- Advertising Software company Zeta (NYSE: ZETA) fell 3.8%. Is now the time to buy Zeta? Access our full analysis report here, it’s free.
- Automation Software company SoundHound AI (NASDAQ: SOUN) fell 3.3%. Is now the time to buy SoundHound AI? Access our full analysis report here, it’s free.
- Data Analytics company MicroStrategy (NASDAQ: MSTR) fell 4.6%. Is now the time to buy MicroStrategy? Access our full analysis report here, it’s free.
- Cloud Monitoring company Datadog (NASDAQ: DDOG) fell 3%. Is now the time to buy Datadog? Access our full analysis report here, it’s free.
Zooming In On MicroStrategy (MSTR)
MicroStrategy’s shares are extremely volatile and have had 77 moves greater than 5% over the last year. In that context, today’s move indicates the market considers this news meaningful but not something that would fundamentally change its perception of the business.
The previous big move we wrote about was 10 days ago when the stock gained 5.3% on the news that the Software as a Service (SaaS) sector rebounded following the sell-off in the previous trading session as a weaker-than-expected U.S. jobs report increased the probability of a Federal Reserve interest rate cut. The July Nonfarm Payrolls (NFP) report showed the U.S. economy added only 73,000 jobs, significantly below the 110,000 forecast. This, combined with downward revisions for May and June, signaled a cooling labor market to investors. In response, market expectations for a September interest rate cut by the Federal Reserve surged from roughly 40% to over 80%. A potential rate cut is generally favorable for growth sectors like technology and SaaS, as lower rates can increase the present value of their future earnings, boosting stock valuations.
MicroStrategy is up 24.1% since the beginning of the year, but at $372.45 per share, it is still trading 21.4% below its 52-week high of $473.83 from November 2024. Investors who bought $1,000 worth of MicroStrategy’s shares 5 years ago would now be looking at an investment worth $25,401.
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