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Tech stocks are back, fueled by AI frenzy, slowing rate hikes

by SuperiorInvest

Jen-Hsun Huang, president and CEO of Nvidia Corp., speaks during the company’s event at Mobile World Congress Americas in Los Angeles, California, U.S., Monday, Oct. 21, 2019.

Patrick T. Fallon | Bloomberg | Getty Images

Forget about debt ceiling. Tech investors are in buying mode.

The Nasdaq The composite closed for its fifth straight weekly gain on Friday, jumped 2.5% over the past five days and is now up 24% this year, significantly outperforming other major U.S. indexes. The S&P 500 is up 9.5% for the year and the Dow Jones Industrial Average is down slightly.

Excitement around the chip maker Nvidia blow out earnings report and its leadership in artificial intelligence technology drove this week’s rally, but investors also gained shares Microsoft, Target and Alphabeteach of which has its own AI story.

And with optimism oozes that lawmakers are close to an agreement to raise the debt ceiling and that the Federal Reserve can slow down its pace of interest rate hikes, this year’s stock market is starting to look less than 2022 and rather like the technologically happy decade that preceded it.

“The concentration in these mega-cap tech stocks has been the place to be in this market,” Victoria Greene, chief investment officer of G Squared Private Wealth, said in an interview on CNBC’s “Worldwide Exchange” Friday morning. “You can’t deny the potential in AI, you can’t deny the ability to make money that these companies have.”

At the beginning of the year, the main topic was technology dismissal and cost reduction. Many of the biggest companies in the industry, including Meta, Alphabet, Amazon and Microsoft cut thousands of jobs after a dismal 2022 for revenue and stock price growth. In earnings reports, they emphasized efficiency and their ability “doing more with less” a theme that resonates with the Wall Street crowd.

But investors have now turned their attention to artificial intelligence as companies demonstrate real-world applications of the long-hyped technology. OpenAI exploded after the release of chatbot ChatGPT last year, and its biggest investor, Microsoft, is embedding basic technology in as many products as possible.

Meanwhile, Google offers its own competing AI model every opportunityand CEO of Meta Mark Zuckerberg much more tell shareholders about his company’s progress in AI than the company hemorrhaging money metaverse effort.

Enter Nvidia.

The chipmaker, best known for its graphics processing units (GPUs) that power advanced video games, is riding the wave of artificial intelligence. Stock up 25% this week. to a record high, lifting the company’s market capitalization to nearly $1 trillion after first-quarter earnings beat estimates.

Shares of Nvidia are now up 167% this year, outperforming all companies in the S&P 500. The other three biggest gainers in the index are also technology companies: Meta, Advanced Micro Devices and Salesforce.

The a story for nvidia is based on what’s to come, as its revenue fell 13% last quarter from a year earlier due to a 38% decline in its gaming division. However, the company’s revenue forecast for the current quarter came in roughly 50% higher than Wall Street estimates, and CEO Jensen Huang said Nvidia is seeing “growing demand” for its data center products.

Nvidia said cloud vendors and Internet companies are buying GPU chips and using the processors to train and deploy generative artificial intelligence applications like ChatGPT.

“At this point in the cycle, I think it’s really important not to fight the consensus,” Brent Bracelin, an analyst at Piper Sandler who covers cloud and software companies, told CNBC’s “Squawk on the Street” in an interview Friday.

“The consensus is that when it comes to artificial intelligence, everything is getting bigger,” Bracelin said. “And I think that will continue to be the best way to play AI trends.”

Bracelin’s buy recommendation for Microsoft is up 4.6% this week and is now up 39% for the year. The meta gained 6.7% for the week and has more than doubled in 2023 after losing nearly two-thirds of its value last year. Alphabet rose 1.5% this week, bringing its year-to-date gain to 41%.

One of the biggest drags on tech stocks last year was the steady increase in central bank interest rates. The increase continued through 2023 with the Fed funds target spread rises to 5-5.25% at the beginning of May. But at the Fed’s last meeting, some members indicated they expected economic growth to slow to eliminate the need for further tightening, according to minutes released Wednesday.

Less aggressive monetary policy is seen as a bullish sign for technology and other riskier assets, which typically outperform in a more stable rate environment.

Still, some investors worry that the tech rally has gone too far given the vulnerabilities that remain in the economy and the government. A divided Congress is making a deal on the debt ceiling more difficult as the Treasury Department’s June 1 deadline looms. Republican negotiator Garret Graves of Louisiana told reporters Friday afternoon at the Capitol that “we still have big issues that we haven’t closed the gap on.”

Treasury Secretary Janet Yellen he said later Friday that the US will likely have enough reserves to stave off a potential debt default by June 5.

Alli McCartney, CEO of UBS Private Wealth Management, told CNBC’s “Squawk on the Street” on Friday that after the recent rally in tech stocks, “it’s probably time to take some of that off the table.” She said her group spent a lot of time researching the risk market and where the trades were happening, and they noticed some clear froth.

“You’re either an AI or you’re not right now,” McCartney said. “We really have to be prepared 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 levels, certainly, prices in the U.S. are hitting a high note for everything, and it seems to be an awfully uncertain place where risks are exposed .”

WATCHES: Full CNBC interview with UBS’s Alli McCartney

Watch the full CNBC interview with UBS's Alli McCartney

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