Nvidia Corp. President and CEO Jen-Hsun Huang speaks during the corporate event at Mobile World Congress Americas in Los Angeles, California, the United States, on Monday, October 21, 2019.
Patrick T Fallon | Bloomberg | Getty Images
Forget the debt ceiling. Tech investors are in buy mode.
The Nasdaq The Composite finished Friday for its fifth consecutive weekly gain, up 2.5% over the past five days. It’s now up 24% for the year, far outperforming the other major US indices. The S&P 500 is up 9.5% for the year and the Dow Jones Industrial Average is down slightly.
Excitement about chip manufacturers Nvidia’s Blowout’s earnings report and its leadership in artificial intelligence technology were drivers of this week’s rally, but investors also bought shares of Microsoft, Meta And alphabeteach with their own AI story to tell.
And amid optimism that lawmakers are close to an agreement to raise the debt ceiling and that the Federal Reserve may slow its pace of rate hikes, this year’s stock market is looking less to 2022 and more to the tech-savvy decade that’s coming its way preceded.
“The focus on these mega-cap tech stocks has been the defining factor in this market,” said Victoria Greene, G Squared Private Wealth’s chief investment officer, in an interview on CNBC’s Worldwide Exchange Friday morning. “You can’t deny the potential of AI, you can’t deny the earning power of these companies.”
At the start of the year, layoffs and cost cutting were the main themes in the technology space. Many of the industry’s largest companies including Meta, Alphabet, Amazon and Microsoft shed thousands of jobs after a dismal 2022 in terms of revenue growth and share prices. In their earnings reports, they emphasized efficiency and their ability to “do more with less,” a theme that resonates with Wall Street folks.
But investors have now shifted their focus to AI as companies unveil real-world applications of the long-hyped technology. OpenAI exploded after the release of chatbot ChatGPT last year, and its biggest investor, Microsoft, is integrating the core technology into as many products as possible.
Google, meanwhile, touts its rival AI model at every opportunity, and Meta CEO Mark Zuckerberg would much rather tell shareholders about his company’s AI advances than the company’s money-stealing Metaverse efforts.
Best known for its graphics processing units (GPUs) that support demanding video games, the chipmaker is riding the AI wave. The stock soared 25% to a record high this week, taking the company’s market cap to nearly $1 trillion after first-quarter earnings beat estimates.
Nvidia shares are now up 167% this year, topping any company in the S&P 500. The next three top performers in the index are also technology companies: Meta, modern micro devices And Foreclosure.
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Nvidia’s story is based on what’s to come, as its revenue fell 13% year over year in its most recent quarter, driven by a 38% decline in its gaming division. But the company’s revenue guidance for the current quarter came in about 50% ahead of Wall Street estimates, and CEO Jensen Huang said Nvidia is noticing “a skyrocketing demand” for its data center products.
According to Nvidia, cloud providers 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 not to fight consensus,” Brent Bracelin, an analyst at Piper Sandler who covers cloud and software companies, said in an interview on Friday on CNBC’s Squawk on the street”.
“The consensus is that with AI, the big ones are getting bigger. And I think that will continue to be the best way to capitalize on AI trends.”
Microsoft, which recommends buying Bracelin, is up 4.6% this week and is now up 39% for the year. Meta is up 6.7% this week and has more than doubled in 2023 after losing nearly two-thirds of its value over the past year. Alphabet is up 1.5% this week, bringing its annual gain to 41%.
One of the biggest drags on tech stocks over the past year has been the central bank’s steady rate hikes. The gains continued into 2023, with the fed funds’ target range widening to 5% to 5.25% in early May. But at the last Fed meeting, some members said they expected economic growth to slow to remove the need for further tightening, according to minutes released on Wednesday.
Less aggressive monetary policy is viewed as a positive sign for technology and other riskier assets, which typically outperform in a more stable interest rate environment.
Still, some investors fear the tech rally has gone too far given lingering vulnerabilities in the economy and government. Divided Congress makes agreement on debt ceiling difficult as Treasury Department deadline of June 1 approaches. Republican negotiator Garret Graves of Louisiana told reporters Friday afternoon at the Capitol, “We continue to have major problems that we have not found a solution to.”
Treasury Secretary Janet Yellen said later on Friday that the US is likely to have enough reserves to avert a possible default by June 5.
Alli McCartney, chief executive of UBS Private Wealth Management, told CNBC’s Squawk on the Street on Friday that after the recent rebound in tech stocks, it’s “probably time to take some of that off the table.” She said her group have spent a lot of time looking at the venture market and deals and they have noticed significant foaming.
“Either you’re an AI now or you’re not,” McCartney said. “We really have to be ready to see if we don’t hit a perfect debt ceiling, if we don’t get a perfect landing, what does that mean, because at levels like that, we definitely calculate on the US hitting the debt ceiling.” I have one on everything high note and given the risks out there, that seems like a terribly precarious place.
REGARD: CNBC’s full interview with UBS’s Alli McCartney