What Happened?
A number of stocks jumped in the afternoon session after a key inflation report met expectations, bolstering hopes for a Federal Reserve interest rate cut, while a separate report indicated rising optimism among small businesses. The July Consumer Price Index (CPI) report showed annual inflation holding steady at 2.7%, aligning with forecasts and increasing the probability of a Federal Reserve interest rate cut to over 94%. Lower interest rates can stimulate the economy by making it cheaper for businesses to borrow and invest.
Further boosting confidence, the National Federation of Independent Business (NFIB) Small Business Optimism Index rose to a five-month high. This is a crucial indicator for the Business Services sector, as many of its companies cater to small and medium-sized enterprises. The combined positive data fueled a broad, "risk-on" sentiment, where investors favor economically sensitive sectors, leading to gains across IT services, staffing, and manufacturing.
The stock market overreacts to news, and big price drops can present good opportunities to buy high-quality stocks.
Among others, the following stocks were impacted:
- Electronic Components & Manufacturing company Plexus (NASDAQ: PLXS) jumped 3.2%. Is now the time to buy Plexus? Access our full analysis report here, it’s free.
- IT Distribution & Solutions company Avnet (NASDAQ: AVT) jumped 3.2%. Is now the time to buy Avnet? Access our full analysis report here, it’s free.
- Specialized Technology company Cognex (NASDAQ: CGNX) jumped 4%. Is now the time to buy Cognex? Access our full analysis report here, it’s free.
- IT Services & Consulting company Grid Dynamics (NASDAQ: GDYN) jumped 3.1%. Is now the time to buy Grid Dynamics? Access our full analysis report here, it’s free.
- Office & Commercial Furniture company HNI (NYSE: HNI) jumped 3.3%. Is now the time to buy HNI? Access our full analysis report here, it’s free.
Zooming In On Cognex (CGNX)
Cognex’s shares are somewhat volatile and have had 10 moves greater than 5% over the last year. In that context, today’s move indicates the market considers this news meaningful but not something that would fundamentally change its perception of the business.
The previous big move we wrote about was 11 days ago when the stock dropped 3.2% on the news that a surprisingly weak U.S. jobs report was released, fueling concerns about a slowing economy. The U.S. economy added only 73,000 jobs, falling significantly short of economists' expectations, while figures for May and June were revised down, erasing 258,000 previously reported jobs. The professional and business services industry itself shed 14,000 jobs. This data points to a cooling labor market, fueling concerns of a slowing economy. A weaker economic outlook often leads to reduced corporate spending on key services like IT consulting and professional staffing, which directly impacts the sector's revenue and growth prospects. The report immediately increased investor expectations of an interest rate cut by the Federal Reserve.
Cognex is up 18.2% since the beginning of the year, and at $42.20 per share, it is trading close to its 52-week high of $43.05 from November 2024. Investors who bought $1,000 worth of Cognex’s shares 5 years ago would now be looking at an investment worth $632.87.
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