Stocks rallied Friday on rising optimism that lawmakers will reach a deal to raise the U.S. debt ceiling, led by the tech-heavy Nasdaq, which closed at its highest level since August. The entire week came down to results from two semiconductor companies – NVidia and Marvell Technologies. These two companies defied the talk of economic slowdown by guiding to massive revenue growth in Q2 buoyed by their exposure to Artificial Intelligence (AI). Nvidia rose by 25% on Thursday and continued climbing on Friday. Marvell saw its stock rise by 32% on Friday after reporting its results on Thursday after the close.
On a more sobering note, the two-year U.S. Treasury yields rose for an 11th straight session after the latest government data showed inflation picking up more than expected. Government statistics showed that the PCE price index, a favorite measure for the Federal Reserve, rose 0.4% in April compared to the previous month, higher than economists had projected. On a year-over-year basis, the PCE price index climbed 4.4%. Following the release of the PCE number, the narrative quickly changed from “Fed may pause” to “Fed will definitely raise interest rates again in June”.
Future Wealth’s View
Following NVidia and Marvell’s astronomical rise in stock price over a period of a few days, money began flooding into semiconductor stocks. The iShares Semiconductor ETF (SOXX) saw $805 million inflow on Thursday alone. There’s no doubt that these companies are on the brink of something big but it’s important to separate hype from reality when talking about any emerging technology. Over the years, we have all seen and heard about NFTs, Blockchain, Bitcoin, Internet of Things, Web 3.0 and so on. Share prices related to companies operating in these spaces have dwindled from the record highs seen when the companies and the news cycles pumped them up. The question investors should be asking themselves before they wildly throw money at AI is to understand the long term viability of the technology and its lasting impact on businesses and the broader economy. If the answer is that AI could transform the way we live and the way businesses are conducted akin to revolutionary changes that smartphones, streaming, e-commerce and the cloud have had on our day to day lives, then AI as a technology is worth investing in. If the answer is no or maybe, the prudent thing to do is to wait until there is further clarity.
In the meantime, Investors will be watching the U.S. debt ceiling showdown again as the threat of a government default of some sort becomes more real. Janet Yellen warned that the Treasury will run out of money by June 5th forcing it to make painful cuts to social security payments and government payrolls. This could get ugly real fast.