After a great start to 2023, Wall Street has faltered in the second half as inflation is still hot and rates are likely to remain higher for longer. Though the Fed has stayed put in September, the U.S. central banks indicated that rates will remain higher for longer. No rate cuts are expected in the near term.
Growth stocks that the tech-heavy Nasdaq primarily holds underperform in a rising rate environment. The index-100 ETF Invesco QQQ Trust QQQ has declined 1.6% in the past month (as of Sep 22, 2023) while the S&P 500 lost 1.8%.
However, in this article, we will highlight why some tech stocks are still investment-worthy despite higher rates. These are Qualys QLYS, Vertiv VRT, Dell Technologies DELL, VMware VMW and Zoom Video Communications ZM.
Is the Worry About Higher Rates Exaggerated?
We believe that no matter if the Fed hikes, pauses or cuts, tech investing will be in fine fettle this year due to the AI boom and the perception that the era of rock-bottom rates is over. Both tech and higher rates are the new normal, and investors are becoming accustomed to it. According to a recent note by Wedbush analyst Dan Ives, the technology sector is poised to weather a prolonged phase of increased interest rates, per a Business Insider article, as quoted on Yahoo Finance.
2023’s AI Frenzy Is Not Same As 2000’s Tech Bubble
The dramatic rise in big tech companies won't come to an end like what the industry saw after the tech boom of the 1990s, according to some on Wall Street, as quoted on Yahoo. Dan Ives commented that "don't be unnerved by the Federal Reserve's and macroeconomic factors. Instead, focus on the imminent, most significant tech revolution we've seen in three decades," per the abovementioned article.
He also hinted that any prospective reductions in interest rates — with the market forecasting at least two for the next year — coupled with the ongoing rise of artificial intelligence, could catalyze a "risk-on environment." Jefferies equity analyst Mark Lipacis believes that 1990s saw companies invest in a Field of Dreams-esque. But AI transformation is a hard-core reality.
AI's potential has already boosted the earnings outlook for leading tech firms such as Nvidia, Microsoft, and Adobe. Ives also mentioned that preliminary assessments of corporate IT expenditure show a slight uptick, indicating a favorable trend for software, semiconductors and digital media equities.
Per Nvidia founder & CEO Jensen Huang, demand for its data center platform for AI is huge and broad-based. According to Huang's estimate, the value of data centers within cloud and enterprise software systems is around $1 trillion.
Tech Stocks to Win
Against this backdrop, we have highlighted a few tech stocks that could be up for gains in the near term. These stocks have a Zacks Rank #1 (Strong Buy) or #2 (Buy).
Qualys, a Zacks Rank #1 stock, is a provider of cloud security and compliance solutions that enable organizations to identify security risks to their information technology infrastructures help protect their IT systems and applications from cyber-attacks. You can see the complete list of today’s Zacks #1 Rank stocks here.
The average earnings surprise for the past four quarters is 14.27%. The Zacks Consensus Estimate for the company’s to-be-reported quarter earnings has moved up from $1.05 to $1.13 in the past 60 days.
Zacks #1 Ranked Vertiv Holdings provides digital infrastructure and continuity solutions. It offers hardware, software, analytics and ongoing services.
The average four-quarter earnings surprise is 25.66%. The Zacks consensus estimate for the upcoming quarter has moved up from 34 cents to 43 cents in the past 60 days.
Dell Technologies, sporting a Zacks Rank of 1, is a provider of information technology solutions. The company's operating segments include Client Solutions, Enterprise Solutions Group and Dell Software Group.
The average earnings surprise for the past four quarters is 39.52%. The consensus estimate for earnings for the upcoming quarter has moved up from $1.36 to $1.47 in the past 30 days.
Zacks #2 Ranked VMware is the pioneer in developing core x86 server virtualization software solutions. With innovative virtualization products and cloud-suit solutions, the company is helping businesses in their digital transformation journey.
The average earnings surprise for the past four quarters is 1.15%. The Zacks Consensus Estimate for earnings for the upcoming quarter has moved up from $1.64 to $1.75 in the past 30 days.
Zoom Video Communications
Zoom Video Communications’ cloud-native unified communications platform, which combines video, audio, phone, screen sharing and chat functionalities, makes remote working and collaboration easy. Undoubtedly, this Zacks Rank #2 company is benefiting from the work-from-home and online learning wave following the coronavirus pandemic outbreak that forced more and more people to stay home.
The average earnings surprise for the past four quarters is 31.65%. The consensus estimate for earnings for the upcoming quarter has moved up from 94 cents to $1.08 in the past 60 days.
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