Our theme of Internet Infrastructure Stocks which includes companies that sell hardware and software for server processors, graphics units, memory, and networking equipment, has returned over 44% year-to-date. This compares to the S&P 500 which remains up by about 25% over the same period. The theme had a solid run, driven by excitement surrounding generative artificial intelligence technologies, with accelerated computing chip vendors Nvidia and AMD and other players within the computing ecosystem, including memory manufacturers such as Micron seeing meaningful gains. Tech stocks, including AI names, have also moved a bit higher since the U.S. election results earlier this week. See Playing the U.S. Elections – Stocks To Pick If You Favor Trump.
Donald Trump’s win in the 2024 election, along with the possibility of Republicans controlling Congress, could turn out to be a big plus for tech companies pouring money into generative AI. Unlike the Biden administration, which was leaning toward tighter scrutiny of AI development including signing an executive order with new reporting rules for AI companies, Trump’s approach appears to be all about cutting red tape and pushing for deregulation. This could ease compliance-related issues and speed up innovation for technology companies and startups, boosting demand for AI infrastructure components sold by the likes of Nvidia, AMD, and Micron. Plus, since AI data centers consume a considerable amount of energy, Trump’s push to expand energy production and ramp up the fossil fuel supply might improve the availability and pricing of electricity, which would be another indirect win for AI projects.
In September, the Fed implemented its first interest rate cut in nearly four years, lowering rates by 50 basis points. Yesterday, it carried out another 25 basis point cut. With the benchmark federal funds rate now at 4.50% to 4.75%, there’s still room for further cuts. While the president does not directly influence monetary policy, Donald Trump has a record of being vocal about lowering interest rates to drive economic growth. Check out our analysis of other ways to profit from the Fed’s next move? Lower rates are typically beneficial for growth sectors including technology, which have higher earning potential in outer years, as lower discount rates boost the present value of future earnings.
The lower rates are particularly beneficial to the broader internet infrastructure theme. Why? A softer rate environment would reduce financing costs for builders of large data centers, potentially driving up capital spending in the space, and helping players like Nvidia, Micron, and AMD. The economics of the AI revolution are still challenged by high model training and inference costs and the payback equation could become just a bit more favorable with declining interest rates.
The increase in the Internet Infrastructure theme over the last 3-year period has been far from consistent, with annual returns being considerably more volatile than the S&P 500. Returns for the theme were 45% in 2021, -38% in 2022, and 68% in 2023. In contrast, the Trefis High Quality Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could the theme face a similar situation as it did in 2022 and underperform the S&P over the next 12 months – or will it see a jump?
While the structural shift toward greater digitization will drive growth in the theme in the long run, valuations are a bit high, making the risk-to-reward trade-off a bit less attractive for the near term. Within our theme, Nvidia stock has been the strongest performer of late, rising by about 200% over the past 12 months, as demand for graphics processing units surged. On the other side, Cisco stock has been among the weaker performers, returning about 15% over the past 12 months. Did you know that Nvidia recently beat Apple to become the world’s most valuable company and will join the Dow Jones Industrial Average on Friday? See how Nvidia Stock Can Surge To $200
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