After a great start to 2023, Wall Street started to waver in the second half as the inflation is still hot and rates are likely to remain higher for longer. Though the initial part of this week was favorable for Wall Street, stocks again fell on Aug 24 as the initial comments from Fed officials leaning toward a hawkish outlook in an effort to tame inflation.
Currently, there is an 80.5% likelihood that the Fed will maintain its benchmark interest rate within the 5.25% to 5.50% range during the upcoming September meeting, according to the CME FedWatch Tool. September rate hike or not, one thing is evident from the latest Fed minutes that interest rates are likely stay elevated for a longer period time. No rate cuts are expected in the near term.
Growth stocks that the tech-heavy Nasdaq primarily hold underperform in a rising rate environment. Hence, the index-100 ETF Invesco QQQ Trust QQQ slumped 2.1% on Aug 24 while the S&P 500 lost 1.4%.
Is the Worry for Higher Rates Exaggerated?
We believe that no matter if the Fed hikes, pauses, or cuts, tech investing will be in fine fettle this year due to the AI boom and the perception that the era of rock-bottom rates is over. Both tech and higher rates are the new normal, and investors are becoming accustomed to it.
2023’s AI Frenzy Is Not Same As 2000’s Tech Bubble
Nvidia’s blockbuster earnings once again proved that the AI boom is here to stay. However, the dramatic rise in big tech companies won’t come to an end like what the industry saw after the tech boom of the 1990s, according to some on Wall Street, as quoted on Yahoo.
Jefferies equity analyst Mark Lipacis believes that 1990s saw companies invest into a Field of Dreams-esque. But AI transformation is hard-core reality. Per Nvidia founder & CEO Jensen Huang, demand for our data center platform for AI is huge and broad-based. Nvidia’s demand visibility extends well into 2024 and its supply for the next few quarters remains on an uptrend.
According to Huang’s estimate, the value of data centers within cloud and enterprise software systems is around $1 trillion. He noted that capital expenditure in these sectors is moving towards developing accelerated computing and generative AI capabilities, amounting to only $250 billion as yet. This expenditure highlights that the transition is still ongoing.
Nvidia & Its Partners to Keep Tech Space Afloat Despite Higher Rates
During recent earnings calls, Big Tech giants Amazon (AMZN) and Alphabet GOOGL indicated that Nvidia GPUs are powering some of their AI projects. Meta said generative AI is holding users on the app longer and generating additional revenue.
Some of the big names that experts say are likely to win with Nvidia include Apple AAPL, Amazon, Meta, Microsoft MSFT, Salesforce (CRM), and IBM (IBM), Anat Alon-Beck, a professor at Case Western Reserve University School of Law, told Yahoo Finance.
Amazon and Microsoft have existing cloud partnerships with Nvidia, while Meta has a consumer-focused partnership with the chip giant. Snowflake SNOW and VMware VMW also have relatively new enterprise partnerships, per the Yahoo article.
ETFs in Focus
Against this backdrop, below we highlight a few tech ETFs that could be up for gains in the ongoing AI transition process.
Global X Robotics & Artificial Intelligence ETF BOTZ – Nvidia takes 14.66% of the fund
Consumer Discretionary Select Sector SPDR Fund XLY – Amazon takes 24.4% of the fund
Communication Services Select Sector SPDR Fund XLC – Meta & Alphabet combined take 35% of the fund
Pacer Data and Digital Revolution ETF TRFK – Vmware takes 5% of the fund
Technology Select Sector SPDR Fund XLK – Apple and Microsoft combined take about 45% of the fund
Amazon.com, Inc. (AMZN): Free Stock Analysis Report
Apple Inc. (AAPL): Free Stock Analysis Report
Microsoft Corporation (MSFT): Free Stock Analysis Report
VMware, Inc. (VMW): Free Stock Analysis Report
Invesco QQQ (QQQ): ETF Research Reports
Technology Select Sector SPDR ETF (XLK): ETF Research Reports
Alphabet Inc. (GOOGL): Free Stock Analysis Report
Snowflake Inc. (SNOW): Free Stock Analysis Report
Consumer Discretionary Select Sector SPDR ETF (XLY): ETF Research Reports
Global X Robotics & Artificial Intelligence ETF (BOTZ): ETF Research Reports
Communication Services Select Sector SPDR ETF (XLC): ETF Research Reports
Pacer Data and Digital Revolution ETF (TRFK): ETF Research Reports
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