How this week's market upended what Fed rate cuts mean for tech stocks

That's when Federal Reserve Chairman Jerome Powell will address the central bank's annual economic symposium in Jackson Hole, Wyoming

Investors will be listening carefully to Powell for hints on whether central bankers might cut interest rates as many three times before the end of the year, as the market thought was possible a week ago, or whether they will, at best, cut only twice, as the market thinks now after the rather hawkish minutes of the Fed's July meeting were released Wednesday afternoon

According to the CME FedWatch tool, the base case for the year remains at two rate cuts, where it has been for a while

The wild card? The odds of only one or up to three

The market this week has signaled which stocks might do better under each of those extremes

In the acute rotation that began on Tuesday, when the up-to-three rate cuts by year-end scenario was on the table, we saw investors book fits in momentum stocks and high-growth year-to-date winners and buy value-oriented and lower multiple names that can actually benefit from more cuts via upward earnings revisions

Stocks Palantir , for which three or one rate cuts mean nothing in the face of their ties to artificial intelligence and other secular trends, were sold heavily Tuesday and into Wednesday's session

Names stock Depot , which needs lower policy rates to spur cheaper mortgages, were bought

Investors looked past Depot's quarterly earnings and revenue misses to signs of a better back half of the year

When the Fed minutes came out Wednesday afternoon, the market rotation eased

Palantir bottomed and closed off its lows on Wednesday and made it into the green Thursday

Depot, on the other hand, came off Wednesday's session highs and closed lower

The stock was lower again Thursday

Again, fewer rate cuts means earnings revisions won't be upwardly revised as much as we may have thought to start the week

If Depot, or any other rate beneficiary, was priced for two cuts, but we could see three, investors had reason to believe the earnings estimates were too low

That thesis doesn't hold up, though, if the odds of that third rate cut diminish or go to one

The reason all this attention is on the Fed is that low rates are generally considered to be positive for stock valuations

Whether you want to value a stock via the lens of a discounted cash flow model or a multiples-based price-to-earnings ratio , lower rates tend to result in a higher present value for stocks

That's especially true for the high flyers that don't have much fit, if any, in the present but are expected to see robust earnings grow in the future

The reason? Future earnings have a higher present value at a lower rate because they are discounted back at a lower rate

That textbook school of thought, however, does appear to conflict with the real-world market action of the past couple of days, with premium-valuation stocks getting hit as investors started to price-in a more dovish Fed, only for the rotation to let up as soon as the Fed minutes dropped and pointed to central bankers, perhaps, maintaining more of a hawkish stance after all

Historically, it's been the other way around

It comes down to relative year-to-date performance and which companies need low rates to win

While lower rates do result in a higher present value being ascribed to future earnings, the current growth names, largely tied to the AI investment trade, have ven their ability to grow regardless of the interest rate environment

Low rates may help momentum stocks' valuation, but they don't do much in terms of upward revisions to earnings estimates over the next three to six months — again, many don't even have real earnings to begin with

More cyclical names, on the other hand, stand to see earnings estimates revised higher as they generate money here and now

Lower rates can also catalyze investments among a host of others

Palantir bably isn't going to make more money in the third and fourth quarters because the Fed lowers the overnight bank lending rate 75 basis points instead of 50 basis points

Back then, our mantra for the year was to only invest in companies with real earnings. "We do not want companies that only grow sales but lose boatloads of money," Jim Cramer told members then, adding that 2022 was the year that "you want to own companies that make stuff, that do tangible things, that innovate." The focus then was on what rates meant for valuation

When the cost of money is cheap or non-existent, as was the case during the pandemic, some investors could rationalize speculating on a flying car company's potential earnings 10 years out, but if the cost to borrow rises, then the more traditional view is it's better to own a real car company whose valuation is based on its current financial file

The focus now is less on valuation dynamics and more on earnings revisions

Bottom line So, as we await Powell's Jackson Hole speech, be mindful of this dynamic and understand that while a dovish tone has traditionally been supportive of the high-flying growth stocks due to valuation dynamics, that may not be the case this time around

Wall Street is more focused on near-term earnings revisions than valuation model dynamics

If dovish talk is, as it should be, taken to mean lower mortgage rates and more infrastructure investments, it will be the economically sensitive, cyclical names that benefit, more so than the secular growth names that are tied to themes AI that couldn't care less 25, 50, or even 75 basis point changes in the federal funds rate. (See here for a full list of the stocks in Jim Cramer's Charitable Trust.) As a r to the CNBC with Jim Cramer, you will receive a trade alert before Jim makes a trade

Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio

If Jim has talked a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade

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