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With the Federal Reserve set to begin cutting interest rates this week, analysts believe tech stocks could get a big boost.
The start of a rate cutting cycle will be a positive signal for markets, which have remained relatively muted since the market meltdown in August sent the “fear index” soaring. This, paired with the boom in tech spending thanks to artificial intelligence, will create ideal conditions for tech stocks, researchers at Wedbush, led by Dan Ives, said in a note.
“In a nutshell we believe the stage is set for tech stocks to move higher into yearend and 2025,” Ives said.
Interest rates have remained at 23-year-highs of 5.25% to 5.50% since July 2023. At its Sept. 17-18 meeting, the Federal Open Market Committee is widely expected to carry out a 25-basis-point cut. A soft landing for the U.S. economy and a “generational spending cycle” on AI will create an ideal growth environment for the sector, Ives said.
The investment firm estimates for every $1 spent on an Nvidia (NVDA) GPU chip, there is a $8-$10 multiplier across the tech sector. Ives said the tech supply chain appears to be gearing up for an “unprecedented period of growth” driven by an estimated $1 trillion of AI spending over the next few years.
This activity will spur other tech players — from semiconductor and software, to infrastructure, Internet, and smartphones — to get in on the AI action over the next 12 to 18 months, according to Ives.
“While Nvidia and Microsoft (MSFT) are the core drivers of AI now we are seeing many other tech stalwarts join the AI Party including Oracle (ORCL), ServiceNow (NOW), Palantir (PLTR), Salesforce (CRM), Dell (DELL), IBM (IBM), Apple (AAPL), AMD (AMD) among others,” he said.
Despite some market concern around AI spending, strategists say Nvidia earnings are giving a green light to Big Tech to continue this spending spree. The chipmaker reported record second-quarter revenue of $30 billion for this fiscal year — up 122% from a year ago. Analysts had expected revenue of $28.7 billion for the second quarter — more than double its previous year revenue of $13.5 billion, according to FactSet (FDS).
Nvidia — whose chips are used to train generative artificial intelligence models — has become a barometer for the health of AI demand and excitement, given its outsized role in the sector. Its stock has also become a market-driving force, with its stock up 147% so far this year and a $2.92 trillion market capitalization. Shares have fallen more than 4% in the past month, however, as markets brace for the Fed’s decision.