QQQ Blasts Past All-Time High on CPI

The tech-heavy Invesco QQQ Trust (QQQ) surpassed its all-time high price Wednesday as April’s Consumer Price Index (CPI) reported that inflation had cooled slightly from the prior month. 

The $260 billion growth stock proxy had already matched its record on Tuesday but surged past that level as Wednesday trading opened and investors cheered the 0.3% month-over-month CPI inflation reading. The market was expecting a rise of 0.4%. 

QQQ's benchmark index, the NASDAQ-100, also surpassed its all-time high, as did the broader NASDAQ Composite Index. 

Falling interest rates generally create a positive feedback loop for growth stocks. Lower discount rates make their future earnings more valuable, increased investor demand drives their prices up, and lower borrowing costs fuel their growth potential, potentially justifying higher valuations. 

Other risk assets, including cryptocurrency and long-term bonds, benefitted from the cooler CPI reading, as the largest spot bitcoin exchange-traded fund, the iShares Bitcoin Trust (IBIT) rose over 5% and the bond market proxy iShares 20+ Year Treasury Bond ETF (TLT) rose more than 1% by midday Wednesday. 

Like growth stocks, prices for these assets tend to have an inverse relationship with inflation and interest rates. 

Tech, Growth ETFs and Falling Interest Rates

Technology ETFs generally track growth stock indexes that include the largest tech companies. Falling interest rates are generally positive for growth stocks due to a few key factors that influence their valuation and investor sentiment: 

Discounted Cash Flow Valuation

Growth stocks are typically valued using a discounted cash flow (DCF) method. This method estimates the present value of a company's future cash flows. 

When interest rates fall, the discount rate used in the DCF valuation also tends to decline. This is because the risk-free rate of return (often tied to interest rates) is lower. 

With a lower discount rate, the present value of a growth stock's future cash flows is discounted less heavily, resulting in a potentially higher stock price. 

Investor Sentiment

Falling interest rates can sometimes signal a favorable economic outlook. This can lead to more optimistic market sentiment, potentially favoring riskier assets like growth stocks. 

This is a general trend, and other factors can also influence growth stock prices. For example, a company's actual performance and its ability to deliver on its growth promises are crucial determinants of its stock price. 

Understanding how interest rates affect growth stock valuations and the investment environment have traditionally helped investors make more informed decisions about their portfolios.