The recent news has pushed US equities higher, with all three major stock indexes reaching or approaching all-time highs. The S&P 500 has risen 4.2% in May after a 4.2% decline in April, as traders become more optimistic about price growth and interest rates, which are influenced by the Federal Reserve.
According to Goldman Sachs, stocks tend to either rise or fall significantly when inflation surprises on the upside or downside. The firm’s US equity strategy chief, David Kostin, pointed out that markets move 0.7% in either direction when CPI data is released, compared to a 0.5% move on other days.
Lower inflation is crucial for some stocks, especially unprofitable technology companies that rely on low interest rates and inflation. Goldman Sachs found that a group of unprofitable growth stocks tracked by their strategists has performed poorly when core CPI exceeds estimates, but has surged when inflation is lower than expected.
Companies that are expected to become profitable in 2024 or 2025 have seen a decline in their stock prices this year, while those projecting profitability in 2026 or later have experienced even greater declines. The current higher costs of capital are posing challenges for companies that need to raise capital to stay afloat.
Despite the current environment being tough for unprofitable, growth-focused companies, this group could see a boost if inflation falls back to the Federal Reserve’s 2% target. Goldman Sachs has identified 21 growth stocks that were unprofitable last year but are expected to turn profitable by 2024 or 2025, with a forward enterprise value-to-sales ratio below 5x.
These fast-growing, unprofitable firms have the potential to become profitable by the end of 2025, providing opportunities for investors looking for growth in the coming years.