Most market observers would agree that one of the dominant forces driving the market rally over the past year was advancements in the field of artificial intelligence (AI). On the other hand, investors have been keeping a close eye on the trajectory of the economy as inflation continues to decline. Recent economic indicators suggest that conditions are ripe for the Federal Reserve Bank to begin cutting interest rates, which could happen as early as the end of this month.
Investors have also been keenly interested in the pace of AI adoption, looking for indicators that this trend still has momentum, and recent results suggest these secular tailwinds continue to blow.
Against this backdrop, the semiconductor specialist Broadcom (NASDAQ:AVGO) soared 20.7% this week, according to AI chip specialist Nvidia (NASDAQ: NVDA) rose 17.1% and the cloud database and artificial intelligence provider Oracle (NYSE: ORCL) rose 13.9% as of 2:57 p.m. ET Thursday, according to data provided by S&P Global Market Intelligence.
It appears that strong results from one of the trio and hopes for a rate cut helped fuel a rally in the space.
A double dose of good news
Late last week, Broadcom reported third-quarter results for its fiscal year 2024 (ending August 4), and while the results were better than expected, the stock initially sold off on the news. However, as investors had time to digest the results, cooler heads prevailed, helping fuel a rally.
Broadcom generated revenue of $13.1 billion, up 47% from a year earlier, while adjusted earnings per share of $1.24 rose 18%. The results were driven by strong demand for the company’s Ethernet and custom accelerators used in AI-focused data centers. At the same time, however, Broadcom’s smartphone chip business, once its mainstay, continues to struggle.
This weakness in Broadcom's traditional business contributed to weak guidance for the upcoming fourth quarter, which helped fuel the initial sell-off. However, the company received some good news earlier this week, as Apple introduced its iPhone 16 line. KeyBanc analysts cited Broadcom as a key beneficiary, as upgrading to Wi-Fi 7 on those devices requires Broadcom hardware.
Moreover, after a prolonged battle against inflation, the central bank is expected to announce the first in a series of interest rate cuts when Fed officials conclude their two-day policy meeting, which ends on Sept. 18. Most market observers now believe a 0.25% rate cut is imminent.
It's also worth noting that Nvidia CEO Jensen Huang reassured investors this week about the state of AI adoption. During an interview at a tech conference, he noted that the company was experiencing “incredible” demand for its AI processors. As a standard-bearer for AI, this seems to suggest that the trend has a long way to go.
And now what?
What do interest rate cuts have to do with these three AI stocks? The prospect of reaping the productivity benefits of generative AI is certainly intriguing, but some companies have been reluctant to seek new business investments in the face of difficult economic conditions. The first interest rate cut will be an admission by the central bank that the economy is finally past the crisis. This could be the first in a series of rate reductions, which will likely spur additional AI adoption. That, in turn, would benefit our trio of AI-focused companies.
- Broadcom creates many of the semiconductors and other technologies used in data centers, where most AI resides.
- Nvidia is the leading provider of graphics processing units (GPUs) that deliver the computing power needed to power AI systems.
- Oracle provides the cloud infrastructure and AI database capabilities that many will choose to join the AI revolution.
AI adoption has a long way to go. The market is expected to be worth between $2.6 trillion and $4.4 trillion annually, according to global management consultancy McKinsey & Company. Even if they only manage to seize a small part of that opportunity, Nvidia, Broadcom and Oracle stand to gain greatly, as do their shareholders.