AI Superstars Driving Tech Rally, But Rotation Toward New Leaders Looms
Mega-Cap Mania Continues
The summer's tech resurgence shows no signs of abating, as FAAMG giants and semiconductor leaders propel the Nasdaq to fresh highs. Flush with optimism over AI growth trajectories and pricing power, investors have piled back into the secular growth stories that dominated 2023.
Nvidia in particular has captured traders' imagination, with shares of the chip behemoth surging over 30% off its early August lows. Last week's 13% pop came after analysts at Goldman Sachs sung Nvidia's praises, citing robust data center demand for its AI offerings from cloud providers.
AI Spending Spree Underway
The exuberance is understandable given the greenfield opportunities in AI. From cloud providers like Microsoft Azure to tech titans like Google and Meta, an AI arms race is fully underway.
Capital expenditure budgets are being blown out to accelerate investments in AI data centers, training models, and custom silicon. According to BMO Capital Markets, companies could spend over $800 billion on AI by 2025.
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Upside Halo Effect
While the Nvidia story has captivated Wall Street, its rising tide could also buoy key partners and suppliers. Chip equipment makers like Lam Research, Applied Materials, and KLA could be prime beneficiaries of any upbeat capex commentary.
Upstart AI companies making waves in data center acceleration like AMD, Marvell Technology, and Arista Networks may also get an upside catalyst from Nvidia's leadership.
New AI "Magnificent Seven" Taking Shape
However, the mega-cap dominated tech trade likely needs to broaden out to sustain this rally's legs, according to BMO's Belski: "We need to see clear breakouts in semis, software, cybersecurity, cloud computing, and AI to confirm the strength."
To that end, a new group of elite, under-the-radar AI stocks is starting to emerge to challenge the traditional mega-cap pantheon. From cutting-edge AI hardware and software offerings to novel language models and deep learning architecture plays, this "AI Magnificent Seven" is gaining traction among the venture capital and hedge fund set.
Mean Reversion Looming?
For now, the concentration remains squarely in the usual tech leadership - the FAAMGs and Nvidia together comprise over a quarter of the S&P 500's market cap. With the Nasdaq logging its longest win streak of 2024, some counter-trend mean reversion towards cheaper value/cyclical areas may be due.
But the path of least resistance still appears higher, particularly if the Fed signals a dovish pivot at this week's Jackson Hole symposium. Dip buyers continue being rewarded in this manic, AI/mega-cap tech melt-up. The only question is whether the torch can get passed to new leadership before euphoria potentially turns to exuberance.
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