The Federal Reserve finally made the statement Wall Street had been waiting for.
One of the drivers of the current market surge is the impact of artificial intelligence (AI) and hopes of increased productivity that will boost profits. But historically high interest rates have made adoption of this groundbreaking technology cautious as the Federal Reserve battles persistently high inflation. But comments made by Federal Reserve Chairman Jerome Powell in a speech today suggest the end may be in sight.
As of 3:28 p.m. ET on Friday, chip designer Arm Holdings (ARM 4.56%) was up 4.7%, chipmaker Nvidia (NVDA 4.55%) was up 4%, semiconductor foundry Taiwan Semiconductor Manufacturing Co. (TSM 2.91%) was up 2.6%, and semiconductor giant Broadcom (AVGO 2.48%) was up 2.1%.
After checking all the usual sources (earnings results, regulatory filings, analyst ratings and price target changes), we found very little company-specific news driving these AI stocks higher (more on this later), suggesting investors were focused on the Fed's policy shift and its impact on the future.
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Persistent and stubborn inflation
The final vestige of the recession is the Fed's ongoing battle with inflation. Just last week, the Bureau of Labor Statistics released the first inflation figures in years. The most widely followed inflation measure, the Consumer Price Index (CPI), rose 2.9% year-on-year in July, but only 0.2% quarter-on-quarter. This was the lowest rate since the beginning of 2021. The “core” data, which excludes volatile food and energy prices, rose 3.2% compared to the same period last year and 0.2% quarter-on-quarter.
Chairman Powell's comments today signaled that a dramatic policy shift is on the way. Pointing to a recent slowdown in the labor market, Powell said “the time has come to adjust policy,” suggesting that rate cuts will begin next month. “The direction we must move is clear,” he continued. “The timing and pace of rate cuts will depend on upcoming data, the evolving outlook, and the balance of risks.”
Investors welcomed the decision, saying lower interest rates would make borrowing cheaper for businesses and consumers and help boost the economy.
AI Wildcard
Another development that helped lift Evercore's stock price was Evercore ISI, which maintained its outperform (buy) rating on Evercore and raised its price target to $150, which could represent a 21% gain for investors compared to Thursday's closing price. The analyst noted that heavy capital spending by the cloud infrastructure provider suggests Evercore will report stellar results when it reports next week.
Beyond that news, the following four companies are all well positioned to benefit from the growing adoption of AI.
Nvidia provides the graphics processing units (GPUs) that provide the computing power needed for AI systems. Arm Holdings supplies the next-generation CPU cores in Nvidia's processors, a key component of AI processing. TSMC is the world's largest foundry and makes many of the most cutting-edge AI chips, with its largest customers including Nvidia and Arm. Broadcom supplies many of the processors used in data centers and cloud computing, making it a key player in AI.
AI has been getting a lot of attention since the beginning of last year, and the world's largest data center and cloud infrastructure providers have been preparing for a surge in demand. But small and medium-sized businesses have been reluctant to take on additional debt or spend money on new technologies until there is more clarity on the overall economic picture. Powell's comments are the clearest sign yet that we are out of the woods, and lower interest rates could encourage additional spending on AI adoption.
But enthusiasm about the potential of these AI-centric stocks is driving up valuations: Arm Holdings, Nvidia, Broadcom, and TSMC are trading at 87, 47, 35, and 26 times forward earnings, respectively. With valuations like these, these stocks are not for the faint of heart.
Nvidia is the poster child for AI, having delivered four consecutive quarters of triple-digit growth with triple-digit growth expected next week, so its premium valuation is well-deserved. Arm has delivered four consecutive quarters of record results due to its unique position in the AI ecosystem. Broadcom and TSMC are even cheaper and well positioned to benefit from accelerating AI adoption.
Danny Vena invests in Nvidia. The Motley Fool invests in and recommends Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
