- The SPDR S&P 500 ETF Trust (SPY) bounced back from early lows
- However, valuations from the technology sector are a concern
- Rebound potentials from Meta Platforms and more make SPY stock worthwhile
Few retail investors missed the recent The SPDR S&P 500 ETF Trust (NYSE:SPY) rally. For over a decade, buying the dip in the widely followed index worked. Why should this time be any different for SPY stock? Investors need to watch inflation, interest rates and stock valuations to anticipate where the S&P 500 index will head next.
Inflation is running hotter than anyone expected. The Federal Reserve is probably the most unprepared with the monthly rise in the consumer price index. This suggests the S&P 500’s direction may change after the U.S. Bureau of Labor Statistics (BLS) reports March 2022 inflation numbers on April 12.
Market timers may try to predict the index’s direction next. Skillful investors should ignore the market volatility and instead monitor the interest rate levels and corresponding stock valuations.
|SPY||The SPDR S&P 500 ETF Trust||$450.54|
The SPY Stock Rebound Explained
Investors loaded up on SPY stock when the index exchange-traded fund (ETF) settled twice below $420. After many months of anticipation, the U.S. Federal Reserve raised rates by only 25 basis points. The amount is too low to increase government debt cost obligations or raise monthly mortgage rates for consumers.
When the BLS posts consumer price index figures for March, stock markets may renew worries over the Fed’s next rate hike in May. In the last 12 months, CPI increased by 7.9%. The Fed’s 0.25% hike appears too small to slow the pace of higher costs.
Markets are speculating the central bank could list the Russian invasion of Ukraine as a primary reason for accelerated inflation. But prices rose before that event, so investors should brace for a rate increase of at least 50 basis points in May.
The SPY stock rebound benefited short-term traders the most. Bears covered their short-selling position as markets staged a relief rally. Renewed concerns about stock valuations will return in the coming months.
Watch Out for Unfavorable Valuations
Technology companies on the S&P 500 index have the biggest risk of re-testing lows. For example, Amazon (NASDAQ:AMZN) managed its quarterly earnings by booking paper gains from its Rivian Automotive (NASDAQ:RIVN) holdings. It also announced a 20-for-1 stock split and a $10 billion stock buyback. The aggressive plan sent AMZN stock quickly back to its 200-day moving average.
Amazon trades at unfavorable values. This is normal. The e-commerce giant has historically demonstrated its ability to grow cash flow. Its online storefront benefits from market share growth, while customer growth for Amazon Web Services increases profits.
Investors are willing to overlook the extended valuations of TSLA stock. The company continues to benefit from the first-mover advantage in the EV market. It does not need to spend much to advertise its brands. Rivian, Lucid, Ford Motor (NYSE:F) and General Motors (NYSE:GM) will need to spend hundreds of millions of dollars in advertising. They face an uphill battle competing with Tesla.
Fortunately, Ford and General Motors account for only 0.173% and 0.167%, of the index, respectively.
Rebound Opportunities in the S&P 500
With a weighting of around 1.3%, the valuation discount in Meta Platforms (NASDAQ:FB) may give the S&P 500 a modest lift. Fearful investors dumped FB stock after the company warned that it may lose $10 billion in revenue from Apple’s (NASDAQ:AAPL) iOS privacy lockdowns.
SPY stock investors get the perfect hedge. AAPL stock will rise further as customers appreciate the company safeguarding their data privacy. This punishes the advertising revenue potential from Facebook, Instagram and WhatsApp.
Still, Meta Platforms is pivoting away from its reliance on social networks. It needs an aggressive push to augmented and virtual reality to guarantee its survival. Facebook users are spending less time, according to BuzzFeed.
Contrarian investors may bet that consumers are habitual. For example, Facebook reported a decline in daily active users for the first time. People may miss the Facebook news feed and would return to the site.
SPY stock is a safe way to take a small bet that FB stock will recover, Apple stock will find new highs and Tesla will keep rising.
On the date of publication, Chris Lau did not have (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.