What Happened?
A number of stocks fell in the afternoon session after investors rotated from the high-multiple growth names that led the recent rally.
Software companies are priced on earnings projected years into the future, and the discount rate applied to those future cash flows is sensitive to both inflation expectations and the Federal Reserve's rate path. The May import price data introduced the sharpest inflation surprise of the session: prices rose 1.9% against a 1.1% forecast, with an annual gain of 6.7%, the largest since August 2022. The data complicated the view that the Iran peace deal had cleanly resolved the inflation problem. Investors appeared to be rotating into cyclicals on falling oil and positioning cautiously ahead of new Chairman, Kevin Warsh's first Federal Reserve meeting later in the week.
The Bank of America fund manager survey added structural pressure. Portfolio managers cut allocations to tech stocks broadly, naming an AI bubble as the second-largest tail risk, cited by 28% of respondents. SpaceX's announcement that it is acquiring AI coding platform Cursor for $60 billion also contributed unease: the deal absorbs one of the most closely watched independent AI development tools into a mega-cap infrastructure play, signalling that the most valuable AI software assets are being consolidated rather than remaining available as standalone platforms.
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:
- Vulnerability Management company Rapid7 (NASDAQ: RPD) fell 2.7%. Is now the time to buy Rapid7? Access our full analysis report here, it’s free.
- Data Analytics company Amplitude (NASDAQ: AMPL) fell 2.7%. Is now the time to buy Amplitude? Access our full analysis report here, it’s free.
- Data Infrastructure company Elastic (NYSE: ESTC) fell 2.9%. Is now the time to buy Elastic? Access our full analysis report here, it’s free.
Zooming In On Elastic (ESTC)
Elastic’s shares are very volatile and have had 28 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 1 day ago when the stock gained 4.1% on the news that yields fell as the Trump administration announced a new peace deal that would lead to the reopening of the Strait of Hormuz.
Software companies are among the most sensitive to long-term interest rates because their valuations depend on earnings projected years ahead. The discount rate applied to those forward cash flows is derived from the risk-free rate, in practice, the 10-year Treasury yield.
When that yield drops to 4.41%, its lowest since mid-May, valuations across the sector improve without a single new contract being signed. Beyond the rate mechanics, the macro improvement matters for enterprise software specifically: customers who had deferred purchasing and renewal decisions during the period of geopolitical uncertainty now face a more settled planning environment.
Elastic is down 17.1% since the beginning of the year, and at $60.14 per share, it is trading 36.3% below its 52-week high of $94.47 from November 2025. Investors who bought $1,000 worth of Elastic’s shares 5 years ago would now be looking at only $436.45.
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