Tech news in 3 minutes

Pro: Rate hike winners

1 d ago

Bank of America advises investors to rethink their playbook for a higher-for-longer rate environment, highlighting that quality and value stocks in the Russell 2000 have historically outperformed during Federal Reserve hiking cycles. The Fed raised rates by 25 basis points last week to a target range of 3.75%-4%, its first hike in over three years, as Chairman Kevin Warsh fights stubborn inflation. BofA expects two more 25-basis-point hikes this year. Long-term yields surged to near 20-year highs, with the benchmark 10-year Treasury spiking 14 basis points to 5.116% on Wednesday—its largest one-day move in 18 months—driven by hawkish Fed commentary, high oil prices, and robust economic activity. Higher yields pressure stocks as investors shift to risk-free bonds, but BofA argues that during hiking cycles, quality stocks (strong balance sheets, consistent cash flow) and value stocks (temporarily out of favor) lead the Russell 2000. Quality stocks should continue to lead given likely further hikes, while value stocks may accelerate as profits grow. BofA screened Russell 2000 stocks ranking high on factors that outperform during hikes: Madison Square Garden Entertainment (up 45% YTD, buy-rated, strong cash flow returns), First Bancorp (up 30% YTD, banks benefit from higher loan rates), and Peloton (down 20% YTD, top-ranked on free cash flow and return on invested capital, amid a turnaround with new treadmills and AI-powered training). These companies have proven revenue, earnings, and cashflow resilience despite higher interest rates.