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“Our bullish stance on tech is unchanged despite market fears,” Wedbush analysts led by Dan Ives, a tech bull, said in a note Wednesday, highlighting various positive factors for the industry including the growth of artificial intelligence, cloud, and a rebound in ad-spending.
Tech (NYSE:XLK), which is down about 5% over the past month, has been pressured by the hawkish Federal Reserve meeting earlier in September that has pushed Treasury yields to levels not seen since the global financial crisis in 2007. Rising rates make future profit appear less valuable, and the impact is particularly acute in higher-priced growth sectors including tech.
But the current rate scare, and the “obsession” with the 10-year Treasury yield will dissipate as the Federal Reserve cuts rates in 2024, leading to a soft a landing, Wedbush added.
The Fed’s latest projections on the path of interest rates, released last week, showed the Fed members revised the number of rate cuts for next year to two from four previously. As well as the fewer rate cuts, the Fed maintained its outlook for another rate hike for this year, forcing markets to reprice in a higher for longer interest rate environment.
The fundamentals for tech, meanwhile, are yet to be priced in, Wedbush argues, pointing to “transformational growth” of artificial intelligence, cloud, cyber security, and rebound in the digital advertising market.
Wedbush believes the upcoming earnings season from big tech will not only be positive but also serve as “sneak peak” for what’s to come in 2024. Central to that theme, is AI, which will continue to spur a massive of wave of enterprise spending on hyperscale, or AI-related data center infrastructure – used to power AI models like ChatGPT – benefitting Microsoft (NASDAQ:MSFT), Google (NASDAQ:GOOGL), and Amazon (NASDAQ:AMZN).
“While this 3Q tech earnings cycle will not in itself turn the negative bearish sentiment away, we expect a positive earnings season for Big Tech which we view as a sneak preview for a major rebound in growth across the tech sector in 2024 with a soft landing backdrop,” Wedbush added.
Wedbush is not alone in talking up the promise of AI. JPMorgan believes the AI hype is real and it’s here to stay.
“They’ve come off the boil since July, but there’s still a lot of optimism regarding AI’s impact on growth, profits and productivity,” {{0|JPMorgan said in its published outlook on Sept. 26, referring to the recent weakness in AI-related stocks.
