Easing inflation and interest rate expectations brings life back to beaten up tech stocks

Some of the most decimated tech stocks are emerging as the best performers in the new financial year. The S&P/ASX 200 Info Tech Index is up almost 8% in July as investors rotate back into growth.

Elevated recession fears and plummeting commodity prices are beginning to support a more dovish medium-term outlook for central banks, which in turn supports the valuations of rate sensitive tech stocks. 

Trash turned to treasure

Tech and growth related names are staging a massive re-rate on Wednesday, albeit from a 40-90% dip from all-time highs. Notable climbers include:

• Zip (ASX: ZIP) +15.7.%

• Megaport (ASX: MP1) +11.8%

• Life360 (ASX: 360) +10.2%

• Temple & Webster (ASX: TPW) +9.8%

• Xero (ASX: XRO) +5.8%

Zip share price chart (Source: TradingView)

Food for thought

Several commodities have been smashed in the past month, notably:

• Natural gas -39.5%

• Wheat -24.5%

• Copper -22.4%

• Crude oil -15%

The recent decline in commodity prices might not necessarily show up in near-term CPI prints, but does suggest easing consumer prices could be on the horizon.

As RBA Governor Philip Lowe said on Tuesday, “inflation is forecast to peak later this year and then decline back towards the 2-3 per cent range next year.

The light at the end of the tunnel for inflation supports a more accommodative neutral interest rate that favors stable economic growth while keeping inflation under control.

CPI and Brent crude oil divergence

This has in turn helped bolster the valuations of 'long duration' and rate sensitive tech stocks.

However, commodity prices are falling due to recession fears and if the global economy does fall into a recession - then none of this really matters.

Rough waters ahead

So far, we've witnessed valuation compression, or a decline for the 'price' in price-to-earnings.

As earnings season comes around, what happens to 'earnings'.

Will there be a small pullback for corporate earnings amid industry-wide labour shortages, supply chain issues and elevated costs?

Will rising interest rates derail consumer spending and send the economy and consequently corporate earnings into a rut?

Or will improved inflation and interest rate expectations help the market regain confidence for future earnings, and the bull market resumes?