The rise of artificial intelligence (AI) has been one of the biggest drivers of the market's surge since the start of last year, while economic uncertainty and persistent inflation have acted as a counterweight to keep investor enthusiasm in check.
The Federal Reserve is determined not to cut interest rates until inflation is under control. As a result, interest rates remain at 20-year highs and investors are clamoring for them to fall. The latest inflation reading came in better than expected, sparking a broad market rally.
With this as a backdrop, chip designers Arm Holdings (Nasdaq: ARM) Semiconductor manufacturers up 4.1% NVIDIA (NASDAQ: NVDA) Memory and storage chipmakers rose 3.9%. Micron Technology (Nasdaq: MU) AI solutions providers, up 3.4% C3.ai (NYSE: AI) Semiconductor giant rose 1.9% Broadcom (NASDAQ: AVGO) It was up 1.3% as of 11:59 a.m. ET on Wednesday.
Checking all the usual sources of information, such as regulatory filings, earnings results, and analyst ratings and price target changes, we found some significant company-specific news that helped drive these AI stocks higher (more on this shortly). That said, most investors are comfortable with the gradual improvement in the economy and what it means for the future.
Persistent and stubborn inflation
Prices continue to cool, a welcome development for cash-strapped consumers, according to the Bureau of Labor Statistics' latest monthly inflation report. The most widely followed inflation measure, the Consumer Price Index (CPI), rose 3.3% year-over-year in May. Prices were flat month-over-month. This is the first time in nearly two years that the CPI has not increased year-over-year. increase Sequentially.
Both figures were above expectations. Economists had been expecting inflation to rise 3.4% from a year earlier and 0.1% from the previous quarter. The “core” data, which excludes volatile food and energy prices, rose 3.4% from a year earlier and 0.2% from the previous quarter, below expectations of 3.4% and 0.3%, respectively.
While the Federal Reserve continues to struggle to hit its elusive 2% inflation target, Wall Street is eager for signs of improvement and investors are buying.
The underlying data suggests the fight is far from over: Food prices were steady, but gasoline prices rose 2.2%, and home prices (mostly rent) rose for the fourth straight month, leaving consumers feeling the strain of persistently high housing-related costs.
Investors are eager for the Fed to start cutting interest rates, which would help stimulate economic activity. However, the Fed has signaled that it won't cut rates until inflation starts to subside. While this is the first positive sign in a long time, the Fed will likely need more evidence before it starts cutting rates.
Other catalysts
There were other developments in the field that also fuelled the rise of AI.
Following its highly-anticipated 10-for-1 stock split, NVIDIA has received bullish sentiment from Wall Street, with analysts at Oppenheimer and Argus both maintaining a buy rating on the company's stock and raising their target price for NVIDIA stock to $150 each.
For investors, that represents a potential gain of 24% compared to Tuesday's closing price. Oppenheimer sees NVIDIA as “best positioned for AI” with its full stack of networking, hardware and software, while Argus sees NVIDIA's stock “still with plenty of upside potential” and “continued momentum” in fiscal 2025.
Broadcom also drew attention with bullish comments from analysts. CityHe suggested that strong AI sales and the continued integration of its VMware acquisition will help the company beat expectations and report a profitable quarter.
AI has been gaining attention since early last year, but some companies are reluctant to step up spending on the new technology, especially if it involves additional debt at high interest rates. Promises that generative AI will boost productivity are not enough to motivate most companies to make the necessary initial investments until the economy is on a firmer footing.
Investor excitement has driven up valuations in the sector: Micron Technology, Arm Holdings, Nvidia and Broadcom are selling for 174, 96, 46 and 31 times projected earnings, respectively, yet C3.ai isn't even profitable.
NVIDIA has already demonstrated its ability to profit from the AI revolution, with four consecutive quarters of triple-digit growth and another quarter of growth expected. That has earned the company a premium valuation and makes it my favorite in the group. Arm Holdings has delivered three consecutive quarters of record performance, fueled by its position as a gatekeeper in the AI ecosystem. Micron and Broadcom are more expensive but well positioned to benefit from the surge in AI usage. With an uncertain strategy and lack of profits, I view C3.ai as simply too risky, but time will tell.
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Citigroup is an advertising partner of The Ascent, a Motley Fool property. Danny Vena invests in Nvidia. The Motley Fool invests in and recommends Nvidia. The Motley Fool recommends Broadcom and C3.ai. The Motley Fool has a disclosure policy.
Why Nvidia, ARM Holdings and other artificial intelligence (AI) stocks surged Wednesday morning was originally published by The Motley Fool.
