BT Money Hacks: Will AI and Fed-cuts continue to power tech stocks?
Lee Kim Siang
AS THE Federal Reserve cut its benchmark interest rate in mid-September, investors quickly turned their attention to riskier assets, particularly technology stocks. With analysts predicting a continued upward trend for tech stocks through the end of 2024 and into 2025, many are left wondering: what’s driving this momentum, and should investors be concerned?
In this week’s episode of Money Hacks, correspondent Howie Lim speaks to Dom Rizzo, portfolio manager, global technology equity strategy, T. Rowe Price, as they explore the current state of tech stocks, the role of artificial intelligence (AI), and what retail investors should consider moving forward.
The impact of artificial intelligence on tech stocks
Artificial intelligence has emerged as the primary driver behind the recent surge in tech stock valuations. Companies like NVIDIA have seen their stock prices soar, reflecting the growing demand for AI technologies. The global technology sector was trading at high teens multiples earlier this year, but as excitement around AI has grown, valuations have adjusted to around 23-24 times earnings. Historically, peak valuations have reached 26-28 times earnings, meaning we are still within a reasonable range.
Moreover, signs of recovery are emerging in various tech subsectors. Personal computers and smartphones are showing improved sales, and significant capital expenditure investments from major tech firms suggest a robust outlook. With hyperscalers planning to ramp up their spending, particularly on AI-related technologies, the fundamental setup for tech stocks appears promising.
Understanding the technology sector
When discussing tech stocks, it’s essential to recognise that the sector is multifaceted. Four main sub-sectors are worth highlighting: hardware (including semiconductors and networking equipment), software, Internet companies, and payment solutions. Each of these areas presents unique opportunities for investors.
The “Magnificent Seven”— the largest tech firms — are crucial players in this landscape. These companies benefit from aggregator economics, where controlling demand allows them to commodify supply. These firms have historically outperformed the market, growing their earnings significantly faster than their peers.
BT in your inbox
Start and end each day with the latest news stories and analyses delivered straight to your inbox.
The outlook for tech stocks
Looking ahead, the outlook for tech stocks varies by sector and geography. Technology is a favourable investment area, particularly as interest rates decrease and fundamental growth accelerates. While the Magnificent Seven may see a deceleration in earnings growth due to their strong performance in 2024, other stocks within the tech universe are beginning to experience accelerating earnings per share growth.
Investors should consider diversifying their portfolios within the tech sector. As the market continues to evolve, being able to identify and invest in these growth areas will be key.
Practical investment tips for retail investors
For retail investors, navigating the tech landscape can seem daunting, especially when many tech stocks come with high price tags. In the episode, Rizzo shares with Howie some actionable tips for listeners to consider.
The tech stock landscape is dynamic, driven by innovations in artificial intelligence and the evolving needs of consumers and businesses. As we move toward the end of 2024 and into 2025, investors should remain vigilant and informed. By understanding the nuances of the technology sector and implementing a solid investment strategy, retail investors can position themselves for success in this exciting market.
For more episodes, go to bt.sg/moneyhacks and if you have feedback or an episode idea, please get in touch at btpodcasts@sph.com.sg.
Copyright SPH Media. All rights reserved.
