The financial media and some so-called Wall Street gurus are banging the drum that the artificial intelligence (AI) trade is being overpriced and way ahead of expectations about what this once in a lifetime secular theme will deliver to investors.
With the recent AI-led tech rally hitting pause last week and bond yields falling on softer inflation data in early June, the recent surge in mega-cap AI growth stocks to new highs collided with overbought technical levels to cause some short-term profit taking. This round of consolidation in the leading AI names is highly constructive.
Big parabolic moves higher leave huge gaps underneath that result in more volatile pullbacks that create doubt in the minds of investors about the longevity of a stock’s uptrend. Quite frankly, I am pleased to see how the top 10 AI stocks have been trading in the past week, after some fear-of-missing out (FOMO) moves fueled by massive options trading and leverage.
Hot growth stocks take the stairway up to new highs, then the elevator back down to rising support trendlines. The moves up and down can be stunning.
The AI trade is aided by what is arguably one of the most hated stock rallies of all time by some fund managers who simply have not embraced what is happening within the greatest capital spending cycle in history. Some famous Wall Street chief investment officers called for a recession in 2024. While leading like the Pied Piper, they scared investors into putting $6 trillion-plus into money markets and short-term instruments, while the AI-rich Nasdaq rallied in the past nine months amid eye-popping forecasts for capital spending in AI-driven applications, equipment, data centers, networks and all manner of devices.
For those market veterans who respect technical analysis, the recent price action has been volatile enough to shake out a lot of hot and leveraged trading-money, while allowing professional fund managers and retail investors an opportunity to initiate and add to positions in the top-rated AI stocks at attractive entry points. From the chart above, there is potential for another 6% downside that would test the 50-day moving average (orange line). From there, the heart of earnings season is just one month away from bringing its own set of post-July 4 fireworks, making the current period of consolidation an appealing time to pick up some great AI stocks on sizeable dips.
Looking at the nine-month chart where this rally kicked into high gear under the notion 3-4 future Fed rate cuts were in the cards, this 33% rally of the S&P 500 paused during April when the inflation data came in hotter than forecast. The chart below shows the yield on the 10-year Treasury gapped to 4.75% from 4.20% during the same time as the S&P 500 gave back 7.7%.
During this garden-variety pullback for the market, there were some key developer conferences that fortified the message AI bulls have been shouting from the hilltops — this is the biggest advance in technology of all time. The Alphabet I/O Conference held May 14, the NVIDIA GTC Conference held the week of May 22, the Microsoft Build Conference held May 24-25 and Apple’s Worldwide Developers Conference from June 10-14 collectively planted the flag for the next leg up for the biggest AI-centric stocks.
When the bond market regained its footing after several softer-than-forecasted economic reports, coupled with the first interest rate cuts coming from the Bank of Canada and the European Central Bank, it was a green light for stock investors and the rally in mega-cap AI stocks was back on following a healthy month of consolidation. The climb took the Nasdaq and S&P 500 to new all-time highs.
This past week saw some very constructive technical back-and-filling price action for the best of breed AI stocks that fall into several categories — Graphics Processing Units (GPUs), Application Programming Interfaces (APIs), generative AI software, memory storage, hard drives, liquid cooled servers and end-user products. We now are on the cusp of a global refresh cycle for PCs and wireless devices to include AI functionality.
It all starts with AI infrastructure, also called the AI stack, which refers to the integrated hardware and software environment that supports artificial intelligence and machine learning (ML) workloads, facilitating efficient data processing and decision-making for AI and ML projects. The AI stack includes software, hardware and networks that are essential to build and deploy AI-powered applications. There are six basic components of artificial intelligence infrastructure that investors need to consider when researching which stocks to invest in to get the fullest exposure to the AI revolution:
- computational power
- networking and connectivity frameworks
- data handling and storage solutions
- data processing frameworks
- security and compliance
- machine learning operations (MLOps)
To understand the future of demand for AI, a recent survey stated that 83% of companies polled claim that using AI in their business is a top priority. This widespread commitment to applying AI by American and global companies continues to demonstrate the potential size of the market being created over the next 3-5 years, making for what should be a fine time to grow portfolios in a very healthy manner.
Shares of NVIDIA Corp. (NVDA), Microsoft Corp. (MSFT), Amazon.com Inc. (AMZN), Alphabet Inc. (GOOG), Apple Inc. (AAPL), Meta Platforms Inc. (META), Broadcom Inc. (AVGO), Micron Technology Inc. (MU), Qualcomm Inc. (QCOM), Super Micro Computer Inc. (SMCI), Dell Technologies Inc. (DELL), Oracle Corp. (ORCL), Applied Materials Inc. (AMAT) and Western Digital Corp. (WDC) are my favorite names to own and trade.
I oversee a handful of separate trading services that where AI stocks dominate the weekly strategies recommended. Click here to learn about Hi-Tech Trader, Micro-Cap Stock Trader, Breakout Options Alert, Quick Income Trader and Premium Income Pro to find out how to join and get my best trades in what is the greatest money-making opportunities the stock market has ever made available to retail investors. The AI boom is life-changing for portfolios and now is the time to seize the moment with the sector consolidating.
Stock picking for AI winners is key to staying on top of how best to maximize one’s dollars invested into the whole AI experience. There are likely to be a few lead changes in this horse race over the next few years. The Invesco QQQ Trust ETF (QQQ) does a splendid job of positioning a few of the best-of-breed AI stocks within the Top 10 Holdings, accounting for 46% of the fund’s total weighting. There are also about a dozen ETFs with a 100% focus on AI and offer a nice blend of exposure to all the sub-sectors that are benefiting from the AI rollout.
