(Investopedia) - Higher interest rates might not hurt tech stocks now, as AI and history are on their side.
KEY TAKEAWAYS
- Contrary to conventional wisdom, tech stocks as tracked by the Nasdaq 100 have risen in all four of the Fed's most recent tightening cycles.
- Tech stocks tend to fall early in tightening cycles but rebound and recover losses later on.
- AI could be the biggest transformative event for tech in decades, with Wedbush analysts calling it a "1995-like revolution."
- Big tech companies like Google, Microsoft, Amazon, and Nvidia that are heavily invested in AI could be the biggest beneficiaries.
While conventional wisdom says rising interest rates hurt tech and other growth stocks, as they make borrowing money to fund rapid growth more expensive, recent history suggests otherwise.
Tech stocks tend to fall in the early stages of tightening cycles but rebound and recover losses later. The Nasdaq 100—a collection of some of the biggest tech stocks traded on the Nasdaq—has actually risen through each of the past four Fed tightening cycles, outperforming the S&P 500 by the end of three of them.
This includes a stellar 59% gain during the 1999-2000 hiking cycle, which coincided with the final stages of the dot-com rally, though it collapsed after the Fed had finished hiking rates. It also saw a 36% rise between Dec. 2015 and the corresponding month of 2018, when accelerating economic growth prompted the Fed to raise rates from record-low levels.123
The Nasdaq 100 fell by a quarter between March and late December of last year, but has since recovered and is now 5% higher than it was before the Fed started raising interest rates.4
In early 2016, during the initial stages of the previous tightening cycle, the index fell 14% within two months of the first rate hike, amid a broader stock market correction, but by July had fully recovered its losses. It rose through a series of eight rate hikes over the next two-and-a-half-years, ending more than a third above than its pre-tightening level.
AI Could Be Biggest Transformative Event in Decades
History may not be the only tailwind for tech. Analysts at Wedbush Securities believe tech stocks can power through 'higher for longer' interest rates as the artificial intelligence (AI) revolution—which they believe is the tech industry's biggest transformative event since the 1990s internet boom—ushers in a risk-on environment.
The analysts cited an explosion of company use cases for AI and said we may be entering the next phase of massive AI spending, citing AI titan Nvidia's (NVDA) massive earnings beat last quarter. Big tech companies like Google (GOOGL), Microsoft (MSFT), Amazon (AMZN), and Nvidia that have invested heavily in AI could be among the biggest beneficiaries.
By Mack Wilowski
