Tech stocks are back, driven by AI craze, slowing rate hikes

Jen-Hsun Huang, president and chief executive officer of Nvidia Corp., speaks during the company’s event at the 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 buy mode.

The Nasdaq The composite closed for its fifth straight weekly gain on Friday, jumping 2.5% over the past five days, and is now up 24% this year, well ahead of the 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.

The excitement around the chipmaker Nvidia’s blow out results report and its leading position in artificial intelligence technology drove this week’s rally, but investors also snapped up shares of Microsoft, Meta and Alphabeteach of which has its own AI story to tell.

And with optimism is brewing that lawmakers are close to an agreement to raise the debt ceiling, and that the Federal Reserve can slow down its rate of interest rate increases is starting to look like this year’s stock market less like 2022 and more like the tech-happy decade that preceded it.

“Being concentrated in these mega-cap tech stocks has been where 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 of AI, you can’t deny the ability to profit that these companies have.”

Greene: The tech rally is likely to continue due to earnings power and the potential of AI

To start the year, the main theme was in technology layoffs and cost reductions. Many of the largest companies in the industry, including Meta, Alphabet, Amazon and Microsoft, eliminated thousands of jobs after a dismal 2022 for revenue growth and stock prices. In performance reports they emphasized efficiency and their ability to “do more with less,” a theme that resonates with the Wall Street crowd.

But investors have shifted their focus to AI now that companies are showing off real-world applications of the long-hyped technology. OpenAI has exploded after releasing chatbot ChatGPT last year, and its biggest investor, Microsoft, is embedding the core technology in as many products as possible.

Google, meanwhile, is presenting its rival AI model on every opportunityand Meta CEO Mark Zuckerberg would much rather tell the shareholders about his company’s AI progress than the company’s money bleeding metaverse endeavors.

Enter Nvidia.

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

Nvidia stock is now up 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.

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

Nvidia said 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 the consensus,” Brent Bracelin, an analyst at Piper Sandler who covers cloud and software companies, said in a Friday interview on CNBC’s “Squawk on the Street.”

“The consensus is that if AI, the big ones get bigger,” Bracelin said. “And I think that will continue to be the best way to play the AI ​​trends.”

Microsoft, which Bracelin recommends buying, rose 4.6% this week and is now up 39% for the year. The Meta rose 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 the increase for the year to 41%.

One of the biggest casualties of tech stocks last year was the central bank’s consistent interest rate hikes. The increases have continued into 2023, with the fed funds target range climbs to 5%-5.25% the beginning of May. But at the latest Fed meeting, some members indicated they expected a slowdown in economic growth to remove 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 interest rate environment.

Still, some investors are concerned that the tech rally has gone too far given the vulnerabilities that remain in the economy and in the government. The divided Congress complicates a debt ceiling deal as the Treasury Department’s June 1 deadline approaches. Republican negotiator Rep. Garret Graves of Louisiana told reporters Friday afternoon at the Capitol that “We continue to have big issues that we haven’t bridged the gap on.”

Treasury Secretary Janet Yellen said later on Friday that the U.S. will likely have enough reserves to stave off a potential debt default until June 5.

Alli McCartney, managing director at 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 has spent a lot of time looking at the risk market and where trades are taking place, and they have noticed a 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’re definitely pricing in the U.S. and reaching high attention on everything and it seems to be an awfully unsafe place to get the risks out there.”

LOOK AT: CNBC’s full interview with UBS Alli McCartney

Watch CNBC's full interview with UBS Alli McCartney