The final stretch of 2021 brought considerable speculation about several market trends, but one that’s still being discussed is inflation. With prices rising, both investors and regulators are left to consider the best path forward for the U.S. economy. As other companies brace for impact, though, Tesla (NASDAQ:TSLA) could stand to gain.
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As is often the case, these worrying market trends have led the Federal Reserve to impose strict measures. Specifically, Fed Chair Jerome Powell has confirmed that we can expect four rate hikes throughout 2022. Now, investors are raising questions as to what these developments will mean. But as it turns out, names like Tesla stock may actually benefit.
What’s Happening with Tesla Stock
Ever since 2022 began, this electric vehicle (EV) innovator’s market performance has been turbulent. Tesla kicked off the year by reporting impressive delivery statistics for the final quarter of 2021. Since then, however, controversy regarding international partnerships and general market forces have worked against the company. Tesla stock began today by rising, but it has also seen several dips. As of this writing, it’s up by about 1.5% after being down by the same amount just two hours ago.
Today’s performance has Tesla stock in the red by 13% for the past five days, continuing a pattern of overall decline. Still, this afternoon’s growth spurt has pulled shares into the green, reminding investors just how quick TSLA can regain momentum.
The Road Ahead for Tesla
As previously noted, terms like “rate hike” don’t often inspire confidence in investors. Further, when not one but four are on the horizon, it can certainly seem daunting as Wall Street ponders the economic landscape. As InvestorPlace‘s Luke Lango lays out in a recent analysis, though, rate hikes are not always bad for growth stocks. In fact, they can benefit them significantly. Let’s take a look at what this could mean for Tesla stock.
Investors have plenty of reason to approach growth stocks with caution going into 2022. As Lango notes, we saw many such companies suffer losses in 2021 due to anticipatory fears about hikes being on the way. As a result, stock valuations were often pushed down. This type of trend can compel investors to sell off growth stocks. However, when it comes to rate hikes, investors may not have so much to fear now. Lango explains:
“[O]nce those rate hikes materialize, investors check their math and realize that gradual 25-basis-point increases in the Fed funds target rate don’t actually impact valuations all that much. Meanwhile, the fact that the Fed is hiking rates means the economy is doing well, which should mean that growth companies are growing their sales and earnings more quickly.”
Lango adds that, when companies can demonstrate increases in both sales and earnings growth, they can easily offset the valuation compresses caused by rate hikes. That can then cause such companies to end up rising even higher.
Specifically, the analyst cites the performance of Cathie Wood’s flagship ARK Innovation ETF (NYSEARCA:ARKK). Comprised of many high-growth stocks, this exchange traded fund (ETF) rose by 90% between 2016 and 2018. That’s another period when the economy was subject to many rate hikes.
For Tesla stock investors, this should be reassuring. Ford (NYSE:F) may have been hailed as the auto industry’s top growth stock for 2022, but Tesla certainly has the power to surpass it. If Lango’s analysis is correct, this stock could be in for some exciting growth in the next two years — 10x gains to be exact.
The year is just getting started, but as we get ready for coming increases, growth stocks are certainly worth watching. As Lango illustrates, we may be due for a new model of growth stock analysis in times of rate increases.
On the date of publication, Samuel O’Brient did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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