AI Stocks: The Silver Lining in an Otherwise Stormy Tech Market

Over the past two years, stocks related to artificial intelligence (AI) have been the driving force behind significant gains in the stock market. Investors are increasingly viewing AI as a transformative technology, akin to groundbreaking inventions like electricity or innovations such as the internet.

Boosting this trend is a wave of optimism surrounding the economy. With the Federal Reserve completing its series of interest rate hikes and hinting at forthcoming cuts, positive sentiments in growth stocks helped lift market benchmarks. Growth companies tend to flourish in prosperous economic climates where consumers have more disposable income to spend on their products and services.

As a result, the Nasdaq composite surged over 43% in 2023, following a 28% rise in the previous year. However, the market has recently faced turbulence. The announcement of new tariffs by former President Donald Trump raised concerns about increased prices and potential inflation, negatively impacting corporate profits. Consequently, the Nasdaq has slipped into correction territory, experiencing a drop of more than 10% since its peak in December. But here’s some good news: despite the current decline in AI stocks, they continue to shine as a beacon of hope in this challenging market environment. Here’s why.

Nvidia and Palantir Face Double-Digit Drops

Let’s take a closer look at some recent losses among key players. Nvidia (NVDA 3.19%), the leading AI chip manufacturer, has seen its stock plummet by 15% over the past month. Similarly, AI software firm Palantir Technologies has dropped by 17%, while AI voice company SoundHound AI lost 12%. This trend of decline extends to various technology and growth stocks.

Even though these companies and the tech sector as a whole may face short-term challenges due to economic uncertainties, it’s crucial to remember that the long-term outlook for AI remains bright. Analysts anticipate a compound annual growth rate of around 35% for the AI market through 2030, projecting it will exceed $1 trillion by that time.

Solid evidence supports these projections. Industry giants like Meta Platforms (META 3.51%) and Alphabet (GOOG 2.25%) (GOOGL 2.31%) have significantly ramped up their investments in AI. Meta has committed up to $65 billion this year, including plans for a colossal data center project. Alphabet is boosting its capital expenditures by $75 billion this year, with much of that funding earmarked for servers, data centers, and networking—critical components for AI infrastructure.

The Trump administration has also showed its support, endorsing OpenAI’s Stargate project. They aim to assist companies in meeting the substantial power requirements needed to build AI infrastructure, pledging $500 billion over the next four years.

Positive Prognosis from Jensen Huang

Additionally, insights from Nvidia’s CEO, Jensen Huang, provide encouraging news for investors. He recently highlighted that the global expansion of data centers could cost around $1 trillion. Demand for Nvidia’s cutting-edge chip architecture, Blackwell—a significant development in accelerated computing—has surpassed supply during its launch. These trends suggest a pathway for continued growth, even amidst short-term fluctuations in revenue or stock performance.

What This Means for Investors

Currently, this presents a promising opportunity for long-term investors to capitalize on companies that have seen their stock prices dip. For instance, Nvidia is trading at approximately 26 times forward earnings estimates, a notable low compared to its typical range of 40 to 50 times over the past year.

You might wonder, “But what if these stocks fall even further?” It’s important to recognize that timing the market perfectly is nearly impossible. The smartest investment strategy involves purchasing stocks when they appear undervalued or fairly priced. Even if prices drop further, your overall returns are unlikely to be significantly impacted over time.

In light of this, now is an opportune time to consider investing in AI stocks—your silver lining in a turbulent market—while there are attractive bargains on the table, potentially setting up your portfolio for long-term success in this ever-evolving AI landscape.