Federal Reserve Rate Cuts: Implications for Growth Stocks

Valuation metrics and investor sentiment post-rate cuts

Post-rate cuts, growth stocks like DocuSign and Square show improved performance metrics and strong liquidity, enhancing investor sentiment. Share repurchases by Zoom signal confidence in valuations, while Snap's resilience in tough markets reflects positive positioning. Overall, these factors suggest a favorable outlook for growth stock valuations.

"So again, I think that the performance of the company actually is quite reflective of the metrics that we called out with the dollar net retention rate improving sequentially for the first time in several years with the account growth doing well, with the billings growth coming in, I think it was $20 million over the midpoint guide." --- (DOCU, earning call, 2025/Q1)

"Including the net proceeds from this debt offering after issuance costs, we ended the second quarter of 2024 with $10.3 billion in available liquidity, with $9.5 billion in cash, cash equivalents, restricted cash, and investments in marketable debt securities, as well as an undrawn amount of $775.0 million available under our revolving credit facility. This represents an increase of $2.5 billion from the end of 2023." --- (SQ, sec filing, 2024/Q2)

"During the three months ended April 30, 2024, we repurchased on the open market 2,400,305 shares of our Class A common stock for an aggregate purchase of $150.0 million." --- (ZM, sec filing, 2025/Q1)

"So I think a really good example what we can see in moments of volatility like this or where we're seeing in moments where maybe the economic environment is tougher and people start moving down funnel with their marketing investments is that we do particularly well in verticals where we have really good performance for Direct Response." --- (SNAP, earning call, 2024/Q2)

"We expect Cash App to deliver strong gross profit growth in the back half of the year with growth expected to moderate only slightly from the second quarter's 23%, even as we fully lap the benefit from improvements to our structural costs in the second half." --- (SQ, earning call, 2024/Q2)

Macroeconomic conditions during rate cuts

During rate cuts, macroeconomic conditions are characterized by expectations of increased credit losses and shifts in the yield curve. Financial institutions like JPMorgan and Goldman Sachs emphasize the importance of assessing risks and projecting economic scenarios to navigate these changes effectively.

"Some cuts will come into the curve at some point. And in the normal course, if you kind of do a very, very, very supplemental model of the company, you would have like expenses grow -- revenue is growing at some organic GDP like rate, maybe higher, and expenses growing at a similar slightly lower rate, producing a sort of relatively stable overhead ratio." --- (JPM, earning call, 2024/Q2)

"To estimate the potential impact of an adverse macroeconomic environment on our allowance for credit losses, we, among other things, compared the expected credit losses under the weighted average forecast used in the calculation of allowance for credit losses as of June 2024 (which was weighted towards the baseline and adverse economic scenarios) to the expected credit losses under a 100% weighted adverse economic scenario." --- (GS, sec filing, 2024/Q2)

"So, it's quite conceivable, and this is actually on the yield curve that we had in the fourth quarter that had six cuts in it, we were still nonetheless expecting an increase in weighted average rate paid as that migration continues." --- (JPM, earning call, 2024/Q1)

"To estimate the potential impact of an adverse macroeconomic environment on our allowance for credit losses, we, among other things, compared the expected credit losses under the weighted average forecast used in the calculation of allowance for credit losses as of March 2024 (which was weighted towards the baseline and adverse economic scenarios) to the expected credit losses under a 100% weighted adverse economic scenario." --- (GS, sec filing, 2024/Q1)

"And the other thing I want to point out, because all of these questions about interest rates and yield curves and NII and credit losses, it's one thing to project it today based on what -- not what we think in economic scenarios, but the generally accepted economic scenario, which is the generally accepted rate cuts of the Fed." --- (JPM, earning call, 2024/Q1)

Short-term vs. long-term effects on growth stocks

Short-term effects of Federal Reserve rate cuts may enhance growth stock performance through increased investments, as noted by Amazon's focus on immediate impacts. However, Nvidia highlights uncertainty in long-term revenue from emerging technologies, suggesting that while short-term gains are possible, long-term growth remains unpredictable.

"I think we're at the stage now where we're doing both at the same time continually, so we are more apt to talk about the specific investments that we're making and how that might impact our short-term outlook." --- (AMZN, earning call, 2024/Q1)

"We do see the visibility that will be a growth opportunity in Q4. On top of that, we will have our Blackwell architecture." --- (NVDA, earning call, 2025/Q2)

"We may not be able to generate significant revenue from them. Recent technologies, such as generative AI models, have emerged, and while they have driven increased demand for Data Center, the long-term trajectory is unknown." --- (NVDA, sec filing, 2025/Q2)

Key growth sectors to watch post-rate cuts

Post-rate cuts, key growth sectors to watch include software and streaming. Companies like Salesforce and Adobe are demonstrating strong revenue growth and improving margins, while Netflix is focused on sustaining healthy growth rates and managing costs effectively, indicating resilience in these sectors.

"revenue growth of approximately 10% year-over-year in constant currency. And as you can see from our results, we remained committed to this very profitable growth at this incredible level of scale, and we're raising our fiscal '25 non-GAAP operating margin to 32.8%, a 230 basis point improvement year-over-year.And as I told you last quarter, we're delivering incredible record cash flow this year." --- (CRM, earning call, 2025/Q2)

"So we got it to about 13% to 15% revenue growth for the year. We want to continue to sustain that healthy revenue growth beyond this year." --- (NFLX, conference, 2024/05/15)

"Driving this growth was the increase in subscription revenue, which grew to $1.20 billion in the second quarter of fiscal 2024 from $1.07 billion in the second quarter of fiscal 2023, representing 13% year-over-year growth." --- (ADBE, sec filing, 2024/Q2)

"In addition, as part of our goal to optimize shareholder value, we're focused on delivering strong free cash flow per share by driving both profitable growth and managing solutions." --- (CRM, event transcript, 2024/06/27)

"Operating margin for the three months ended March 31, 2024 increased seven percentage points as compared to the prior comparative period, primarily due to revenues growing at a faster rate as compared to the growth in cost of revenues, general and administrative expenses, and technology and development expenses, partially offset by higher growth in marketing expenses as compared to the growth in revenues. Streaming Revenues" --- (NFLX, sec filing, 2024/Q1)