With AI and history on our side, rising interest rates may not hurt tech stocks for now.
Important points
- Contrary to conventional wisdom, tech stocks as measured by the Nasdaq 100 have rallied during each of the Fed’s last four tightening cycles.
- Tech stocks tend to fall early in a tightening cycle, but rebound later in the cycle to recover their losses.
- AI could be the biggest transformational event for the technology industry in decades, with Wedbush analysts calling it a “1995-style revolution.”
- Big tech companies such as Google, Microsoft, Amazon, and Nvidia, which are investing heavily in AI, could stand to benefit the most.
The conventional wisdom is that rising interest rates hurt tech and other growth stocks because it makes it more expensive to borrow money to fund rapid growth, but recent history suggests otherwise. .
Tech stocks tend to fall during the early stages of a tightening cycle, but then rebound and recoup their losses. The Nasdaq 100 (a collection of some of the largest tech stocks traded on the Nasdaq) has actually risen through each of the past four Fed tightening cycles, outperforming the S&P 500 at the end of three of them.
This includes an astounding 59% rise during the 1999-2000 rate hike cycle, which coincided with the final stages of the dot-com rally, but a decline after the Fed ended its hikes. It also rose 36% between December 2015, when accelerating economic growth prompted the Fed to raise interest rates from record lows, and the corresponding month in 2018.
The Nasdaq 100 index fell by a quarter from March to the end of December, but has since recovered and is now 5% higher than before the Fed started raising interest rates.
In early 2016, during the early stages of the last tightening cycle, the index fell 14% within two months of the first rate hike amid a broader stock market correction, but fully recovered its losses by July. . Over the next two-and-a-half years, interest rates rose through eight rounds of hikes, ultimately ending at a level more than one-third above the pre-tightening level.
AI could be the biggest transformational event in decades
History may not be the only tailwind for technology. Analysts at Wedbush Securities believe that tech stocks have a “long-term outlook” as the artificial intelligence (AI) revolution – which they believe is the biggest transformative event in the tech industry since the 1990s internet boom – ushered in a risk-on environment. I believe that we will be able to overcome the current high interest rates.
Analysts cited the explosive growth in AI use cases in enterprises and cited AI giant Nvidia’s (NVDA) huge profits from the previous quarter to drive up massive spending on AI. He said it may be the next step. Big tech companies like Google (GOOGL), Microsoft (MSFT), Amazon (AMZN), and Nvidia, which are investing heavily in AI, could be among the biggest beneficiaries.