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The Fed might never hike rates again. Here are growth stocks for the long run, according to one strategist

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The Fed might never hike rates again. Here are growth stocks for the long run, according to one strategist 2

So just how significant was Federal Reserve Chairman Jerome Powell’s speech on inflation? In the speech that markets were eagerly awaiting, Powell announced the Fed would target inflation to average 2% over time, and that the central bank won’t feel obliged to raise interest rates if it believes the economy is running at full employment.

The S&P 500
SPX,
+0.16%

on Thursday edged up to a new record, while the Nasdaq
COMP,
-0.34%

slipped, though to its second-highest perch ever. U.S. Treasury yields rose, particularly at the long end
TMUBMUSD30Y,
1.514%
,
which isn’t the direction you would expect from an ostensibly dovish move. Perhaps, as University of Oregon professor Tim Duy wrote, the market perceived there was no “meat on the bones of this policy” because the central bank left implementation fuzzy.

But that is the short-term view. Joachim Klement, investment strategist at U.K. brokerage Liberum Capital, said the Fed’s change of policy goals makes it almost inevitable that the next five years will be dominated by a Japan-like environment of low nominal and real, or inflation-adjusted, interest rates.

In a note entitled, “Low rates forever? — Possibly,” Klement points out that had the Fed abided by its new inflation strategy, it would have left interest rates unchanged for a decade after the 2008 financial crisis. “Given the historic experience and current Fed and market implied forecasts, we find it safe to argue that the Fed will not hike interest rates not just for three years, but for the next five years if not longer,” he says.

The Fed might never hike rates again. Here are growth stocks for the long run, according to one strategist 3

The long-run trend on interest rates is clear.

Quantitative easing will continue because the Fed will need to keep nominal rates low across the yield curve, he says. For 10-year Treasurys
TMUBMUSD10Y,
0.739%
,
this means a level of 2% to 2.5% to keep it in the range over the last decade — which would imply a big upward move from current depressed levels “but not enough to impede the cost of borrowing.” The Bank of England and European Central Bank will also have to keep interest rates low, just to avoid having their currencies appreciate versus the dollar
DXY,
-0.73%
,
though the difficult economic situation Europe and the U.K. are facing would make any tightening unlikely anyway.

He concedes, over the next 12 months, growth stocks are priced for perfection, and value may outperform. “However, low nominal and real rates mean that discount factors for future cash flows will decline and with it, stock market valuations are likely to increase. Stocks with a larger portion of cash flows further in the future (in other words growth stocks) experience a stronger rerating than high dividend stocks and stocks with less growth,” he said.

He highlighted companies with strong sales and earnings growth but low leverage, which have the space to further boost their growth through borrowing. For MarketWatch, he produced a screen of S&P 500 companies with strong sales and earnings growth but low levels of financial leverage.

Companies

P/E

Debt/equity

5-yr average EBIT growth (%)

5-year average sales growth (%)

Paycom Software
PAYC,
-0.96%
96.4

11.6

70.5

30.7

Facebook
FB,
-3.51%
35.8

10.7

36.9

36.9

IHS Markit
INFO,
-0.08%
57.8

60.8

32.4

36.7

Arista Networks
ANET,
+0.05%
26.9

3.4

45

24.5

Adobe
ADBE,
-3.43%
67.4

39.3

51.3

22

Nvidia
NVDA,
-1.13%
82.2

21.7

30.3

30.5

Abiomed
ABMD,
+1.62%
82.9

1.1

54.1

19.9

Fortinet
FTNT,
-3.75%
54.9

3.5

42.1

20.8

Intuit
INTU,
+0.77%
49.8

70.3

24.1

24.1

Cigna
CI,
+1.71%
12.2

83.8

18.8

51.9

Prologis
PLD,
+0.86%
66.8

47.5

25.4

22.7

Lennar
LEN,
-1.75%
11.4

48.5

21.8

19.6

Cincinnati Financial
CINF,
+2.49%
22.4

9

26.7

16.5

SVB Financial
SIVB,
+1.07%
14.6

8.8

19.5

19.8

Bristol-Myers Squibb
BMY,
+0.36%
26.4

92

17.9

21

Alexion Pharmaceuticals
ALXN,
+1.73%
10.6

24.5

19.5

17.9

Align Technology
ALGN,
+1.64%
114.3

4.4

22.9

15.9

Progressive
PGR,
+1.23%
10.6

33.2

21.5

15.8

Regeneron Pharmaceuticals
REGN,
+0.48%
24.8

6.7

21.8

14.8

Micron Technology
MU,
-0.75%
21.4

15.9

19

16.5

The buzz

Japanese Prime Minister Shinzo Abe said he will resign over health issues — triggering losses for Japanese stocks
NIK,
-1.40%

and a rise in the Japanese yen
USDJPY,
-1.06%
.

U.S. President Donald Trump accepted the Republican nomination for president, while saying former Vice President Joe Biden would be a “destroyer” of American jobs. Since February, 12.88 million jobs have been lost, according to the Labor Department. There was a huge shift in odds in Trump’s favor on the Betfair exchange, with Biden now just narrowly the front-runner.

Friday’s session of the Jackson Hole symposium includes an address from Bank of England Governor Andrew Bailey, and academic takes on policy uncertainty, expectations in monetary policy and post-pandemic monetary policy. There is also a host of economic releases, including on personal income, trade, and consumer sentiment.

There were a number of earnings reports released after markets closed on Thursday, with HP
HPQ,
+2.01%

and Dell Technologies
DELL,
+0.48%

each reporting strong demand for personal computers, due to the coronavirus pandemic keeping workers at home.

Workday
WDAY,
+1.40%

stock may rally, after the human-resources software company reported better-than-forecast earnings and boosted its guidance for subscription revenue. Identity-management services company Okta
OKTA,
-2.54%

also topped Wall Street estimates on its quarter and outlook. Clothing retailer Gap
GPS,
+2.05%

reported a smaller loss than forecast, thanks to strong online sales.

Coca-Cola
KO,
+0.14%

announced it will offer voluntary separation packages to 4,000 workers.

The markets

U.S. stock futures
ES00,
+0.31%

YM00,
+0.54%

NQ00,
+0.01%

rose.

Gold
GC00,
+1.82%

rallied, and oil futures
CL.1,
-0.13%

turned higher.

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