ETFs
Rate cut or not: technology ETFs will remain strong – May 29, 2024
After anticipating an imminent Fed rate cut, Wall Street began to hesitate from the end of last week in the face of renewed signals from a hawkish Fed. Investors should note that the Fed’s latest minutes indicate concerns about a lack of progress on inflation.
The minutes also showed that several participants expressed willingness to tighten policy further to deal with persistent inflation. The meeting found that inflation was more stubborn than officials had expected at the start of 2024. That means rates are likely to stay high for longer.
This scenario is negative for growth sectors like information technology, as the sector underperforms in a rising rate environment. Since the growth sector relies on easy borrowing to deliver superior growth and its value depends heavily on future earnings, rising long-term yields reduce the present value of future corporate earnings.
But we’ll highlight here why the tech ETF sectors will likely remain strong, whatever happens in the broader economy and whatever the Fed’s impending decision on interest rate policy. Investors should note that the Nasdaq rose above 17,000 for the first time on Tuesday, boosted by gains in NVIDIA (NVDA – Free report) .
Are fears of rising rates exaggerated?
We believe that regardless of whether the Fed raises, suspends or lowers rates, tech investing will be in good shape this year due to the AI boom and the perception that the era of rock-bottom rates is over. Technology and higher interest rates are the new normal, and investors are getting used to it.
A long-term future for technology, driven by AI
“New normal” trends like working and learning from home and online shopping, increased digital payments, and growth in video streaming will certainly remain even if the pandemic has eased. Growing adoption of cloud computing and continued injection of AI, machine learning and IoT are the other winning areas.
We can certainly see some occasional successes and failures in the integration and monetization of AI, but the long-term future is optimistic. The global artificial intelligence market size is expected to witness a compound annual growth rate (CAGR) of 37.3% from 2023 to 2030, by GrandViewResearch, cited on Forbes.
Some nascent areas like AI, and still nascent areas like Metaverse, may be cash outflows for companies, but these initiatives could prove to be the future of the tech sector, if executed. correctly.
The latest AI frenzy is not the same as the tech bubble of the 2000s
The dramatic rise of big tech companies won’t end like what the industry experienced after the tech boom of the 1990s, according to some analysts cited in the Wall Street Journal last year. For some of them, AI is the most important technological revolution we have seen in three decades, while others noted that the 1990s saw companies investing in a field of dreams. But AI transformation is a fundamental reality.
Nvidia CEO Jensen Huang highlighted the unprecedented and widespread demand for the company’s AI chips, citing a shortage of supply rather than a lack of interest from customers. an exclusive interview with Yahoo Finance.
By Huang’s estimate, the value of data centers within enterprise cloud and software systems is around $1 trillion. Taiwanese contract chipmaker TSMC expects 10% annual revenue growth in the global semiconductor industry, excluding memory chips, driven by AI. More importantly, the demand is not only coming from the cloud services provided, but all areas of society – be it pharmaceutical, automotive or energy – have been splurging with AI initiatives.
ETFs will benefit
In this context, investors can closely monitor technology ETFs like Strive US Semiconductor ETF (SHOCK – Free report) , iShares US Tech ETF (IYW – Free report) , First Trust NASDAQ Technology Dividend Index Fund (IVDD – Free report) , Invesco S&P 500 Equal Weight Technology ETF (RSPT – Free report) And First Trust Expanded Technology ETF (XPND – Free report) .
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