Key Points
- Interest-rate sensitive stocks like Arm fell in response to the CPI.
- Arm's valuation is based on earnings that are years away.
- Motley Fool Issues First-Ever 9X Buy Alert ›
Shares of Arm Holdings( ARM-6.45%) were falling today amid a broader sell-off in tech and chip stocks after the September Consumer Price Index (CPI) came in hotter than expected.
That was enough to send tech stocks swooning as it makes it more likely that the Fed will raise interest rates at its next meeting later this month.
Arm is especially sensitive to interest rates because most of the stock's value comes from earnings that are several years into the future, as investors are betting on strong profits from its new AGI CPU, which has yet to go on sale.
As of 3:13 p.m ET, Arm stock was down 6.7% on the news.
Image source: The Motley Fool.
What happened with the CPI
The Consumer Price Index is one of the most important data points in determining the Fed's action on interest rates, and faster-than-expected inflation is more likely to trigger a rate hike to help slow the economy down and reel in inflation.
The CPI rose 3.7% on an annual basis last month, ahead of expectations at 3.6%, while core CPI, which strips out the volatile food and energy categories, was up 2.6%, compared to expectations of 2.5% growth.
Energy prices continue to surge due to the war in Iran, up 5.2% from August, and gasoline was up 9.1%.
What it means for Arm
Inflation doesn't directly impact Arm. While the company's chip designs are found in smartphones and an array of other consumer devices, the stock is down because of valuation-related adjustments. As interest rates go up, the discount rate in the discounted cash flow also goes up, and that makes earnings in the future less valuable than they were.
Investors should expect Arm stock to continue moving up and down according to interest rate expectations.
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About the Author
Jeremy Bowman has been a contributing Motley Fool stock market analyst, covering technology, consumer goods, and macroeconomic trends since 2011. Before The Motley Fool, Jeremy was a newspaper reporter, restaurant manager, and English teacher abroad. He holds a bachelor’s degree in English from Colorado College and a master’s degree in business administration from American University. One of his Motley Fool headlines was briefly featured on Late Night with Stephen Colbert.
