Tech investors are showing more interest in artificial intelligence (AI) technology. The Nasdaq Composite has gained 2.5% in the past five days, marking its fifth-straight weekly gain, and is now up 24% for the year. The S&P 500 is up 9.5% for the year, while the Dow Jones Industrial Average is slightly down. This week’s rally was driven by the excitement surrounding chipmaker Nvidia’s earnings report, which exceeded expectations, and its leadership position in AI technology. However, investors have also been buying shares in other AI companies like Microsoft, Meta, and Alphabet, each with its own AI story to tell.
At the start of the year, the main theme in tech was layoffs and cost cuts. Many of the largest companies in the industry, including Amazon, Alphabet, Microsoft, and Meta, eliminated thousands of jobs after a dismal 2022 for revenue growth and stock prices. They emphasized efficiency and their ability to “do more with less,” which resonated with Wall Street. However, investors have now shifted their focus to AI, as companies are showcasing real-world applications of the long-hyped technology. OpenAI has exploded after releasing the chatbot ChatGPT last year, and its biggest investor, Microsoft, is embedding the core technology in as many products as it can. Google is touting its rival AI model at every opportunity, and Meta CEO Mark Zuckerberg would much rather tell shareholders about his company’s AI advancements than the company’s money-losing metaverse efforts.
Enter Nvidia. The chipmaker, known for its graphics processing units (GPUs) that power advanced video games, is riding the AI wave. Its stock soared 25% this week to a record, lifting the company’s market cap to nearly $1 trillion after first-quarter earnings exceeded estimates. Nvidia shares are now up 167% this year, topping all companies in the S&P 500. The next three top gainers in the index are also tech companies: Meta, Advanced Micro Devices, and Salesforce.
The Potential of AI
The story for Nvidia is based on what’s coming next, as its revenue in the latest quarter fell 13% from a year earlier because of a 38% drop in the gaming division. However, the company’s sales forecast for the current quarter was roughly 50% higher than Wall Street estimates, and CEO Jensen Huang said Nvidia is seeing “surging demand” for its data center products. Nvidia said cloud vendors and internet companies are buying up GPU chips and using the processors to train and deploy generative AI applications like ChatGPT.
“At this point in the cycle, I think it’s really important to not fight consensus,” said Brent Bracelin, an analyst at Piper Sandler who covers cloud and software companies. “The consensus is, on AI, the big get bigger,” Bracelin said. “And I think that’s going to continue to be the best way to play the AI trends.”
Microsoft, which Bracelin recommends buying, rose 4.6% this week and is now up 39% for the year. Meta gained 6.7% for the week and has more than doubled in 2023 after losing almost two-thirds of its value last year. Alphabet rose 1.5% this week, bringing its increase for the year to 41%.
The Bullish Sign of Less Aggressive Monetary Policy
One of the biggest drags on tech stocks last year was the central bank’s consistent interest rate hikes. The increases have continued into 2023, with the fed funds target range climbing to 5%-5.25% in early May. But at the last Fed meeting, some members indicated that they expected a slowdown in economic growth to remove the need for further tightening, according to minutes released on Wednesday. Less aggressive monetary policy is seen as a bullish sign for tech and other riskier assets, which typically outperform in a more stable rate environment.
However, some investors are concerned that the tech rally has gone too far given the vulnerabilities that remain in the economy and in government. The divided Congress is making a debt ceiling deal difficult as the Treasury Department’s June 1 deadline approaches. Republican negotiator Rep. Garret Graves of Louisiana told reporters Friday afternoon in the Capitol that, “We continue to have major issues that we have not bridged the gap on.” Treasury Secretary Janet Yellen said later on Friday that the U.S. will likely have enough reserves to push off a potential debt default until June 5.
Alli McCartney, managing director at UBS Private Wealth Management, told CNBC’s “Squawk on the Street” on Friday that following the recent rebound in tech stocks, “it’s probably time to take some of that off the table.” She said her group has spent a lot of time looking at the venture market and where deals are happening, and they’ve noticed some clear froth. “You’re either AI or you’re not right now,” McCartney said. “We really have to be ready to see if we don’t get a perfect debt ceiling, if we don’t get a perfect landing, what does that mean, because at these kinds of levels we are definitely pricing in the U.S. hitting the high note on everything and that seems like a terribly precarious place to be given the risks out there.”
The recent tech stock rally has been driven by investors’ interest in AI technology. While this trend is expected to continue, some investors are concerned that the tech rally has gone too far given the vulnerabilities that remain in the economy and in government. The divided Congress is making a debt ceiling deal difficult, and less aggressive monetary policy is seen as a bullish sign for tech and other riskier assets. Regardless, the big tech
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