Why Nvidia, Arm Holdings, and other artificial intelligence (AI) stocks rallied Wednesday morning

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One of the biggest catalysts driving the market rally since early last year has been the spread of artificial intelligence (AI). On the other hand, the uncertain state of the economy and stubborn inflation have acted as a counterweight, helping to limit investor enthusiasm.

The Federal Reserve Bank remained steadfast in its commitment, refusing to cut interest rates until inflation was under control. As a result, interest rates remain at 20-year highs, and investors are eager to see them come down. The latest reading on inflation was better than expected, sparking a broad-based market rally.

With this as a background, the chip designer Arm Holdings (NASDAQ: ARM ) Up 4.1 percent, the chipmaker Nvidia (NASDAQ: NVDA ) The memory and storage chipmaker rose 3.9 percent. Micron Technology (NASDAQ: MU ) climbed 3.4%, the AI ​​solutions provider C3.ai (NYSE: AI ) rose 1.9 percent, and semiconductor giant Broadcom (NASDAQ: AVGO ) As of 11:59 a.m. ET on Wednesday, it was up 1.3%.

A check of all the usual sources — regulatory filings, earnings results, and changes in analysts' ratings and price targets — turned up a few pieces of company-specific news that sent these AI stocks higher. I helped (more on that in a moment). That said, most investors are upbeat about the growing economic recovery and what it means for the future.

Image source: Getty Images.

Continuous and anti-inflation

The latest monthly report on inflation, released by the U.S. Bureau of Labor Statistics, shows that prices continue to cool, a welcome development for cash-strapped consumers. The Consumer Price Index (CPI), the most widely followed measure of inflation, rose 3.3 percent in May from a year earlier. Prices were flat month over month. This is the first time in almost two years that the CPI has not done so. increase Sequentially

Both numbers came in better than expected, as economists had forecast inflation to rise 3.4% year-on-year and 0.1% sequentially. “Core” data, which includes volatile food and energy prices, was 3.4% higher than this time last year and rose 0.2% sequentially, both below expectations of 3.4% and 0.3% respectively. .

The Fed has continued to aim for its 2% inflation target, but Wall Street was anxious for any sign of improvement, sending investors on a buying spree.

Basic data suggests the war is far from over. While grocery prices were flat, gas prices rose 2.2 percent, and shelter prices — made up primarily of rent prices — rose for the fourth consecutive month, as consumers struggled with more housing. There are related expenses.

Investors are eager for the Fed to begin cutting interest rates, which will boost economic activity. However, the central bank has indicated that it will not go down this path until inflation cools down. This is the first positive sign in some time, although additional evidence will be needed before the Fed starts cutting rates.

Other catalysts

There were other developments in the space that helped fuel the AI ​​rally.

In the wake of its high-profile 10-for-1 stock split, Nvidia was on the receiving end of bullish sentiment from Wall Street. Analysts at Oppenheimer and Argus raised their respective price targets on Nvidia stock to $150 and maintained buy ratings on the shares.

This represents a potential gain of 24% for investors compared to Tuesday's closing price. Oppenheimer sees Nvidia as “best positioned in AI” thanks to its full stack of networking, hardware and software, while Argus believes Nvidia's shares “have a long way to go” and in fiscal 2025 Positioned for “constant speed”.

Broadcom was also singled out with some sharp comments courtesy of analysts. Citywhich suggested the company would report a “beat and rise” quarter, driven by strong AI sales and continued integration of the VMware acquisition.

While AI has taken center stage since early last year, some businesses are reluctant to increase spending on the new technology, especially if it involves taking on additional debt at higher interest rates. The promise of increased productivity offered by generative AI isn't enough for most companies to make the required initial investment until the economy is on more solid footing.

Investor enthusiasm has driven up valuations in the space. For example, Micron Technology, Arm Holdings, Nvidia, and Broadcom are selling at 174 times, 96 times, 46 times, and 31 times forward earnings, respectively — and C3.ai isn't even profitable.

Nvidia has already demonstrated its ability to capitalize on the AI ​​revolution, with four consecutive quarters of triple-digit growth and forecasting another on the way. Hence, it commands a premium price and is my favorite of the bunch. The arm holding has posted three consecutive record-setting quarters, growing its status as a gatekeeper in the AI ​​ecosystem. Micron and Broadcom are more expensive but are also well-positioned to benefit from increased use of AI. With an uncertain strategy and lack of profitability, I consider C3.ai to be very risky, but time will tell.

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Citigroup is an advertising partner of The Ascent, a Motley Fool company. Danny Vena has positions in Nvidia. The Motley Fool has positions and recommends Nvidia. The Motley Fool recommends Broadcom and C3.ai. The Motley Fool has a Disclosure Policy.

Why Nvidia, Arm Holdings, and other artificial intelligence (AI) stocks rallied Wednesday morning was originally published by The Motley Fool.

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