‘Tidal Wave’ of AI Spending to Power Tech Bull Market

(Bloomberg) -- The promise of artificial intelligence to rewire large swaths of the American economy supercharged tech shares for most of the year before the fever broke this fall. But investors would be remiss in thinking AI’s power to juice returns is over.

That’s the view of Dan Ives, the Wedbush tech analyst known for his bullish takes on the sector. He says expectations for AI’s impact on all corners of the industry are too low, he anticipates a “tidal wave” of spending on AI applications that should boost shares in the likes of Apple by nearly 30% over the next year. 

“We view AI as the most transformative technology trend since the start of the Internet in 1995 and believe many on the Street are underestimating the $1 trillion of AI spend set to happen over the next decade in a bonanza for the chip and software sectors,” Ives wrote in a research note. 

Despite a murky macroeconomic backdrop – with the Federal Reserve’s interest rate hiking campaign and soaring US Treasury yields – the technology sector has managed to lead the broader market higher this year as investors flocked to companies with strong balance sheets that could withstand a potential economic downturn. 

Hype over artificial intelligence and cloud computing also drove investors to snap up stocks of companies set to be winners in the growing trends. The Nasdaq 100 has surged more than 41% in 2023, trumping the S&P 500 Index’s nearly 15% gain.  

There are already signs that AI monetization has started to impact the technology sector, Ives said, pointing to recent solid quarterly results from Microsoft Corp., Datadog Inc. and Palantir Technologies Inc. that show new ways to harness AI are exploding across the enterprise and consumer landscape. In addition to Microsoft and Palantir, Wedbush’s top picks in the sector include Apple Inc., Google parent Alphabet Inc., Palo Alto Networks Inc., Zscaler Inc., CrowdStrike Holdings Inc., and MongoDB Inc.

Still, the signs that investors may have reservations persist –2 the Nasdaq 100 has struggled to regain its 2023 peak hit in July, and is still below levels hit in 2021. But, Ives says that a “short covering for the ages” could be ahead as the fundamental picture for growth in the sector remains “rock solid.” The current backdrop is a good time to pick up tech stocks poised to gain in 2024, according to Ives. 

“We have always used macro jitters/agita, Fed jawboning, and bond vigilantes taking over the narrative as opportunistic times to buy the best quality growth tech stocks,” he said. “This time is no different.”