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Fed’s Rate Cut Projections Impact Growth Stocks; ARK Invest’s Portfolio Underperforms

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Growth stocks have been affected following the U.S. central bank’s recent policy announcement on Thursday. Despite holding interest rates steady, the Federal Reserve has signaled two rate cuts of 25 basis points each in 2024, a decrease from earlier predictions. By the end of 2025, Federal fund rates are projected to hit 3.9%, marking a 50 basis points rise over past estimates, as part of the Fed’s ongoing strategy to curb inflation.

This scenario is impacting growth-oriented fund manager Cathie Wood of ARK Invest. Despite early backing from successful firms like Tesla (NASDAQ:TSLA) and Block, Wood’s portfolio has underperformed over the past two years. Her leading ARK Innovation ETF lost over two-thirds of its value last year and currently trades at just a quarter of its 2021 peak.

Two of Wood’s stocks, Teladoc (NYSE:TDOC) Health and SoFi (NASDAQ:SOFI), are presently trading close to their 52-week lows. Wood recently upped her investment in Teladoc Health as it hit these lows. The stock, which topped around $295 in February 2021, has been on a downward trend since then, with a significant 74% fall in 2022 and continued underperformance this year.

Despite substantial losses in 2022 driven by billions in write-downs, Teladoc Health sustains a strong ecosystem with roughly 12,000 clients and approximately 86 million members. Analysts anticipate revenue growth in the high single digits for Teladoc in 2023 and 2024 as it broadens its international presence and enters the weight-loss segment. Despite GAAP losses, Teladoc reported positive free cash flows and increased its 2023 free cash flow guidance to $150 million.

Another stock in Wood’s portfolio, SoFi, is part of the ARK Fintech Innovation ETF. Despite the downturn in growth stocks, SoFi has witnessed a 73% rise this year, significantly outperforming the S&P 500. The former special purpose acquisition company (SPAC) added over 584,000 new members in Q2 2023, bringing its total member count to 6.2 million, a 44% increase compared to the same quarter last year.

SoFi provides a range of fintech products and operates its own bank, granting access to low-cost funds. The company has managed to expand its top line without sacrificing credit quality and profitability. It is projected to become profitable on a GAAP basis in Q4 2023, with the resumption of student loan repayments expected to enhance its student loan refinancing business.

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