To The Moon

Many market watchers agree that the AI sector has been a major driver of the market rebound over the past year. Meanwhile, with inflation easing, investors are closely tracking the economy. Recent economic indicators suggest that conditions for a Fed rate cut are maturing, possibly as soon as later this month.

Investors are also keen on AI adoption rates and looking for signs that this trend will continue. Recent results indicate that these long-term tailwinds are set to continue.

Against this backdrop, semiconductor giant $Broadcom(AVGO)$ surged 20.7% this week, AI chip leader $NVIDIA Corp(NVDA)$ jumped 17.1%, and AI cloud provider $Oracle(ORCL)$ rose 13.9%, according to S&P Global Market Intelligence.

Double Good News

Late last week, Broadcom reported Q3 FY2024 earnings Although the results beat expectations, the stock initially sold off. However, after investors had time to digest the results, calm prevailed, leading to a rebound.

Broadcom's revenue hit $13.1 billion, up 47% year-over-year, with adjusted EPS rising 18% to $1.24. This strong performance was driven by high demand for its Ethernet and AI-centric data center accelerators. However, its smartphone chip business, once a major revenue driver, is still struggling.

The weakness in Broadcom’s traditional business led to a weak Q4 guidance, which fueled the initial sell-off. But good news came earlier this week with $Apple(AAPL)$ ’s release of the iPhone 16 series. KeyBanc analysts listed Broadcom as a major beneficiary due to the Wi-Fi 7 upgrade requiring its hardware.

AI Adoption Lags

Additionally, after a long battle with inflation, Fed officials will end their two-day policy meeting on September 18, with the first of a potential series of rate cuts expected. Most market observers now see a 0.25% cut as imminent.

Notably, Nvidia CEO Jensen Huang assured investors of robust AI adoption this week. In a tech conference interview, he highlighted "incredible" demand for the company's AI processors.

How do rate cuts relate to these AI stocks? The first cut would signal a turning point in the economy, potentially spurring further AI adoption. This would benefit AI-focused companies.

AI adoption still has a long way to go. McKinsey estimates the market could be worth between $2.6 trillion and $4.4 trillion annually. Even capturing a small slice of this market would be hugely profitable for Nvidia, Broadcom, and Oracle—and their shareholders.