The Nasdaq Composite has recorded its fifth-straight weekly gain, rising by 2.5% in the past five days. The index is now up 24% this year, outpacing the other major US indexes. The S&P 500 is up 9.5% for the year, while the Dow Jones Industrial Average is down slightly. Tech investors are buying shares of Microsoft, Alphabet, and Meta, each of which has its story to tell about Artificial Intelligence (AI). Excitement surrounding chipmaker Nvidia’s earnings report and its leadership position in AI technology has been a driving force behind this week’s rally.
At the beginning of the year, the tech industry’s main theme was layoffs and cost cuts. Many of the biggest companies in the industry, including Alphabet, Amazon, Meta, and Microsoft, were eliminating thousands of jobs following a dismal 2022 for revenue growth and stock prices. In earnings reports, these companies emphasized efficiency and their ability to “do more with less,” which resonated with the Wall Street crowd. However, investors have now shifted their focus to AI, as companies showcase real-world applications of the long-hyped technology.
Nvidia: The Game Changer
Nvidia is a game-changer in the AI industry. The chipmaker is known for its graphics processing units that power advanced video games and is riding the AI wave. The stock skyrocketed 25% this week to a record, lifting the company’s market capitalization to nearly $1 trillion after its first-quarter earnings exceeded expectations. Nvidia shares have risen by 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.
While Nvidia’s revenue in the latest quarter fell 13% from a year earlier because of a 38% drop in the gaming division, the company’s sales forecast for the current quarter was nearly 50% higher than Wall Street estimates. CEO Jensen Huang said Nvidia is seeing “surging demand” for its data center products, and 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, and I think that’s going to continue to be the best way to play the AI trends.”
The Fed’s Interest Rate Hikes and Debt Ceiling Concerns
The Fed’s consistent interest rate hikes have been a significant drag on tech stocks. The increases continued into 2023, with the funds target range climbing to 5%-5.25% in early May. However, 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. Despite this, some investors remain 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.”
Alli McCartney, managing director at UBS Private Wealth Management, has advised investors to take some of the recent rebound in tech stocks off the table, given the risks out there. 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.”
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