With the interest rate cut landing, will AI continue to take the lead?

At the September interest rate meeting, the Fed lowered the benchmark interest rate by 50 basis points, officially starting the rate-cutting cycle. With the rate cut in place, the market entered a "Risk On" mode, and both the Dow Jones and S&P 500 indices hit historic highs, with the Nasdaq also close to its previous high.

In 2024, technology stocks led by artificial intelligence have driven the market. As expectations for interest rate cuts have grown, the market has begun to refocus on value stocks and small-cap stocks.

In July of this year, small-cap stocks experienced their best monthly performance in 20 years, and value stocks also outperformed technology stocks in the third quarter, leading to speculation about a style shift. However, in the several trading days following the Federal Reserve's interest rate decision on September 18, technology stocks have once again led the market.

Is the outlook for artificial intelligence overestimated, and what impact will interest rate cuts have? This week's 【Opportunity Express】 will attempt to answer these questions.

Is there a bubble in AI?

Goldman Sachs Research believes that despite soaring in the AI boom, there is no bubble in the industry, and these companies are expected to continue delivering returns for investors. Compared to the dominant companies in previous typical bubble periods, there is no clear overvaluation.

For example, during the Internet bubble period in 2000, major representative companies had an average forward PE of 52 times, while the current seven giants of the U.S. stock market are only about 24 times. Compared to previous bubble periods, the profitability of dominant companies is stronger, and their balance sheets are more robust.

As a phenomenal product that ignited the AI era, ChatGPT is continually iterating. In September, OpenAI released the new GPT-01 model. It significantly enhances expressive and reasoning abilities and can simulate human thinking patterns.

The usage time of ChatGPT has also been steadily increasing, having surpassed 5 billion minutes by July this year. It is worth mentioning that the initial data showed incorrect trends due to the impact of the domain switch, which once sparked concerns in the market.

The case is for illustrative purposes only and does not constitute any investment advice or guarantee.

Goldman Sachs Analyst stated that artificial intelligence is entering a deep construction cycle, which will drive the capital expenditures of the entire Industry. Compared to 2023, capital expenditures in artificial intelligence will see a significant increase in 2024 and will remain on an upward trajectory. In the long term, investments in Technology have started to yield results, but some patience is still required.

The Impact of Interest Rate Cuts on the Industry

High interest rates have affected overall mergers and financing, but the Artificial Intelligence Sector has experienced reverse growth. According to S&P Global Statistics, in the first quarter of this year, larger venture capital firms conducted 51 rounds of financing in the field of artificial intelligence, an increase of over 60% compared to the same period last year.

The content of this chart is for reference only and does not constitute any investment advice.

Theoretically, all companies seeking financing will be boosted by falling interest rates. From key hardware like GPUs to the models themselves, both large Technology companies and small startups are investing substantial resources to compete, and a rate cut will accelerate this process.

Wei Debusch stated that the interest rate cut landing is a "green light" for the technology stock trading, which will perform well by the end of this year and even by 2025. With a 50 basis point interest rate cut, the probability of an economic soft landing increases, serving as a catalyst for further growth in the technology industry.

However, the impact of this may not be evenly distributed. Motley Fool believes that large technology companies are also willing to actively increase R&D investment in higher interest rate environments. With the decrease in interest rates and lower capital costs, this investment will become more aggressive, and competitive advantages are expected to further concentrate towards tech giants. Smaller companies may not be able to maintain long-term competitiveness with sufficient investment.

How to invest in AI.

If you want to allocate to companies related to the Technology sector, Futubull has compiled a list of stocks in the AI Sector ($Artificial Intelligence(BK2136)$) for reference, which includes large enterprises such as $NVIDIA(NVDA.US)$、$Broadcom(AVGO.US)$and also popular concept stocks like $Palantir(PLTR.US)$.

From a technical analysis perspective, the sector has formed a double bottom (W-bottom) pattern recently, indicating that the downward trend may have temporarily ended, and prices are expected to stop falling and rise. Currently, the sector has reached the neckline position formed by the previous rebound. It is worth watching whether the future price can effectively break through this level, indicating that the price may continue to rise. If the neckline is broken, it will transform from a resistance level into a potential support level.

Data source: Futu Niu Niu. Data is up to the market close on September 24, 2024. The case is for illustrative purposes only and does not constitute any investment advice or guarantee.

If uncertain about which specific stock to choose, investing in AI-related ETFs may be a better option. Currently, there are larger scale funds with$iShares US Technology ETF(IYW.US)$and$Fidelity Covington Trust Msci Information Technology Index Etf(FTEC.US)$asset sizes all exceeding 10 billion dollars,$Ishares Global Tech Etf(IXN.US)$and$Ishares North American Tech Etf(IGM.US)$with sizes also surpassing 5 billion dollars. These ETF products track different Technology industry indices but all have certain exposure to artificial intelligence. If looking to invest in large Technology stocks, tracking the NASDAQ 100 Index's$Invesco QQQ Trust(QQQ.US)$is also an option.

For relatively aggressive investors, there are also leveraged ETFs developed for individual stocks on the market. For example, the double long ETF tracking NVIDIA ($GraniteShares 2x Long NVDA Daily ETF(NVDL.US)$), currently the asset size is also approaching 5 billion US dollars. It is important to note that leveraged ETFs can only track the performance of products on that day, and will incur losses in a volatile market, so it is best to understand the investment objectives and operation methods of related products carefully before making a decision.

Related Risks

Market concentration is relatively high: According to Goldman Sachs, the top ten companies by market cap now account for the highest share of total market cap in decades, exceeding one-third of the S&P 500 Index, while the market cap of the top five companies accounts for 26% of the index, a figure that surpasses previous bubble periods. However, over time, market concentration has generally been on the rise, possibly due to the increasing investment required to drive technological advancements, especially in terms of computing power and R&D spending. The investment scale needed for industry expansion has also excluded some smaller competitors.

The content of this chart is for reference only and does not constitute any investment advice. Past performance does not indicate future results, and the market carries risks that require cautious investment.

Technology risk: Despite rapid development, the industry is still on the eve of large-scale applications, facing potential technical challenges in the implementation process. Moreover, new breakthroughs and improvements could change the existing industry landscape and intensify market competition.

Macroeconomic environment: If the US economy fails to achieve a soft landing as expected and instead enters a recession, high-risk technology stocks are often impacted.

Risk Disclosure: This content does not constitute a research report, is for reference only, and should not be used as the basis for any investment decision. The information contained herein is not a comprehensive description of the securities, markets, or developments mentioned. Although the sources of information are considered reliable, the accuracy or completeness of the above content is not guaranteed. Furthermore, there is no guarantee regarding the accuracy of any statements, viewpoints, or forecasts provided in this article.