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Interest Rate Rises 0.5%: A Good Omen for Amazon Shareholders?

The day of the Fed's announcement, Amazon stock traded higher by as much as 1.9%. Is the bearish trend coming to an end?

On May 4, the Federal Reserve announced a 50-basis-point raise to short-term interest rates. This is the first time in two decades that the Fed has announced such a steep hike (bumps in interest rates usually happen in 0.25% increments).

Will the Fed knock down the already-bleeding equities market? In theory, yes. However, in reality, quite the opposite has happened. On May 4, the S&P 500 index and the tech-heavy Nasdaq Composite closed at $4,301 and $12,967, respectively.

Even though this slowed down the following day, it's possible that the central bank's rate hike might have a positive impact on Amazon  (AMZN) - Get Amazon.com Inc. Report investors. Here's why.

Figure 1: Interest Rate Rises 0.5%: A Good Omen for Amazon Shareholders?

Figure 1: Interest Rate Rises 0.5%: A Good Omen for Amazon Shareholders?

(Read more from Amazon Maven: Amazon Post-Earnings: What Wall Street Is Saying)

What 's In the Sky? Not a Hawk

A 0.5% rise in interest rates was widely expected by the experts, so when the Fed firstly announced it, around 2 p.m. EST, the equities market did not show any big signs of excitement or disappointment.

However, 45 minutes later, something happened. As he answered questions from the press, Fed Chair Jerome Powell sounded a bit more dovish than the market expected.

Powell still expects the Fed to announce a couple more 50-basis-point increases. But the central bank commander doesn't think a 75-basis-point hike will be necessary. His message was that the Fed wishes to avoid using any higher-than-necessary intervention to combat inflation.

What Changes for Amazon Investors?

From a fundamentals perspective, any bump in interest rates is bad news for Amazon. Higher rates usually translate into (1) less consumption, which directly impacts on the company’s e-commerce segments, and (2) higher cost of capital, through both debt and equity.

However, much of this movement had already been anticipated by the market. Actually, most of the “damage” has already been done: Longer-term interest rates have already been going up for the past few months. Therefore, the hike on May 4 was a mere formalization of a previously priced-in movement.

The Key Takeaway

Truth be told, the 50-basis-point hike has most likely already been implied in Amazon trading price. Therefore, it should had no effect on how bulls and bears see the stock’s future.

The real positive driver for Amazon is the Fed's optimism that it can contain inflation. For one thing, stabilizing consumer prices means the easing of one of the main headwinds the company has been facing so far.

And for another, a dovish monetary policy allows more aggressive valuations, especially for technology companies, which could be reflected in Amazon trading multiples anytime soon.

(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting The Amazon Maven)