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Contrary to popular belief, rising interest rates may not have a negative impact on tech stocks. Recent history and the potential for artificial intelligence (AI) advancements suggest that tech stocks could actually thrive in such an environment.
Traditionally, it is believed that tech stocks and other growth stocks are hurt by rising interest rates. This is because higher rates make it more expensive to borrow money to fund rapid growth. However, historical data suggests a different story. The Nasdaq 100, which tracks some of the largest tech stocks traded on the Nasdaq exchange, has actually risen during each of the Federal Reserve’s most recent tightening cycles. In fact, it outperformed the broader S&P 500 index in three out of four of these cycles.
For example, during the 1999-2000 rate hiking cycle, which coincided with the dot-com rally, the Nasdaq 100 experienced a remarkable 59% gain. Similarly, between December 2015 and the corresponding month of 2018, the index rose by 36% as the economy grew and the Fed raised rates. Despite experiencing a 25% decline between March and late December of 2018, the Nasdaq 100 has since recovered and is currently 5% higher than before the Fed started raising rates.
It is worth noting that tech stocks typically fall in the early stages of tightening cycles but later rebound and recover losses. This pattern suggests that tech stocks are resilient and have the capability to bounce back from temporary setbacks.
Aside from historical trends, the potential for AI advancements also signals positive prospects for tech stocks. Analysts at Wedbush Securities believe that the AI revolution, which they consider to be the most transformative event in the tech industry since the 1990s internet boom, will create a favorable environment for tech stocks even as interest rates rise. They predict a surge in company use cases for AI and expect a new phase of massive AI spending. Companies like Google, Microsoft, Amazon, and Nvidia, which have made substantial investments in AI, could be among the biggest beneficiaries of this trend.
In conclusion, higher interest rates may not necessarily harm tech stocks. Based on historical data and the potential for AI advancements, tech stocks have the potential to thrive even as rates rise. Investors should keep these factors in mind when considering their investment strategies in the tech sector.