Most market watchers would agree that one of the dominant forces driving the market rally over the past year is advancements in the field of artificial intelligence (AI). On the other hand, investors have kept a sharp eye on the trajectory of the economy as inflation continues to wane. Recent economic indicators suggest conditions are ripe for the Federal Reserve Bank to begin interest rate cuts, which could happen as soon as later this month.
Investors have also been keenly interested in the rate of AI adoption, looking for indicators that this trend still has legs, and recent results suggest these secular tailwinds continue to blow.
With that as a backdrop, semiconductor specialist Broadcom (NASDAQ: AVGO) soared 20.7% this week, AI chip specialist Nvidia (NASDAQ: NVDA) surged 17.1%, and database and AI cloud provider Oracle (NYSE: ORCL) climbed 13.9%, as of 2:57 p.m. ET on Thursday, according to data provided by S&P Global Market Intelligence.
It appears solid results from one member of the trio and rate-cut hopes helped spur a rally in the space.
A double dose of good news
Late last week, Broadcom reported the results of its fiscal 2024 third quarter (ended Aug. 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 spark a rebound.
Broadcom generated revenue of $13.1 billion, up 47% year over year, while adjusted earnings per share of $1.24 increased 18%. The results were fueled by strong demand for the company’s Ethernet and custom accelerators used in AI-centric data centers. At the same time, however, Broadcom’s smartphone chip business — which was once its primary breadwinner — continues to struggle.
This weakness in Broadcom’s legacy business contributed to weak guidance for the upcoming fourth quarter, which helped fuel the initial sell-off. However, the company got good news earlier this week, as Apple unveiled its iPhone 16 lineup. Analysts at KeyBanc listed Broadcom as one of the principal beneficiaries, as the upgrade to Wi-fi 7 across those devices requires Broadcom hardware.
Furthermore, after a protracted battle with 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 concludes on Sept. 18. Most market watchers now believe a rate cut of 0.25% is now imminent.
It’s also worth noting Nvidia CEO Jensen Huang reassured investors this week about the state of AI adoption. During an interview at a technology conference, he noted the company was experiencing “incredible” demand for its AI processors. As the flag bearer for AI, this seems to suggest the trend has a long runway ahead.
Now what
What do interest rate cuts have to do with these three AI stocks? The prospect of reaping the productivity rewards from generative AI is certainly intriguing, but some businesses have been reluctant to pursue new business investments in the face of challenging economic conditions. The first interest rate cut will be an admission by the central bank that the economy has finally turned the corner. This could be the first in a series of rate reductions, which will likely spur additional adoption of AI. That, in turn, would benefit our trio of AI-focused companies.
- Broadcom creates many of the semiconductors and other tech used in data centers, where most AI resides.
- Nvidia is the leading provider of graphics processing units (GPUs) that provide the computational horsepower needed to power AI systems.
- Oracle provides the AI database and cloud infrastructure capabilities many will choose to join the AI revolution.
The adoption of AI 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 consulting firm McKinsey & Company. Even if they capture only a sliver of that opportunity, Nvidia, Broadcom, and Oracle will profit handsomely — as will their shareholders.
