AI stocks soared in response to the Fed's decision to cut the benchmark interest rate by 50 basis points. The federal funds rate now stands at 4.75%-5%, and the Fed hinted at two more cuts by year-end, each by 25 basis points.
Despite some market volatility following the announcement, investors were thrilled, pushing major indices higher. The $S&P 500(.SPX)$ was up 1.5%, and the $NASDAQ(.IXIC)$ climbed 2.3%.
Growth stocks, especially those tied to AI and capital investments, saw particularly strong performance.
AI Stocks Soared
$Broadcom(AVGO)$ rose 4%, $Taiwan Semiconductor Manufacturing(TSM)$ jumped 4.3%, and $ARM Holdings Ltd(ARM)$ also increased by 4.3%. $VanEck Semiconductor ETF(SMH)$ followed suit, climbing 4.2%, indicating a broad rally in the chip sector.
Semiconductors and AI stocks are always sensitive to market cycles, but in this environment, concerns about economic strength and persistent AI investment are particularly pressing. However, the interest rate cut alleviates some of these worries. The Fed's unexpected 50-basis-point reduction caught many investors off guard.
Broadcom, a diversified tech company involved in everything from cybersecurity to custom semiconductors, is expected to rake in $12 billion from AI this year. Known for its acquisitions, the lower rates make financing future buys easier, especially after its $VMware(VMW)$ acquisition last year.
TSMC, the world’s largest semiconductor foundry, manufactures for giants like $Apple(AAPL)$ and $NVIDIA Corp(NVDA)$ . Lower interest rates can bolster spending and demand from these major players. Plus, TSMC is building large fabs globally, requiring massive investments. In the U.S., lower borrowing costs will make these projects more feasible.
Arm, a key supplier for companies like $Apple(AAPL)$ and $NVIDIA Corp(NVDA)$ , licenses chip designs. Notably, iPhones account for about half of Arm's royalty revenue, so any boost in iPhone spending is a win for Arm.
Apple’s stock also rose about 4%. Arm's growing focus on AI technology in data centers and other areas means lower rates could drive further investment there as well.
What’s Next for AI Stocks?
With expectations of more rate cuts this year and next, the outlook for these three stocks looks bright.
This easing should help alleviate recession fears and further lift the AI sector. As monetary policy relaxes, it seems AI stocks are poised for another leap forward.
Comments