Drawing inspiration from yesterday’s subdued May inflation report, we’re forecasting a move by the U.S. Federal Reserve that could stir up the tech stock sector in a big way. Our prediction? Interest rate cuts are on the horizon, potentially as soon as September, and these cuts may not stop at just one.
Given this, we anticipate a major ‘melt-up’ for tech stocks over the next couple of years, akin to the tech boom of the late 90s.
Let’s take a moment to recall the landscape of 1998 – a time when the internet had started to take root, making tech stocks a hot commodity. Every day, new internet technologies were seen proving their worth, while investors enthusiastically pushed tech stocks to valuations above 30X forward earnings – an unprecedented level back then. This surge led many to label it as an ‘internet bubble’.
In the late summer of 1998, a stimulus in the form of a Fed interest rates cut unleashed a wave of latent investor funds into tech stocks. The result? Tech stocks skyrocketed by over 250% from late ’98 to early 2000, marking one of their best runs in history!
Fast forward to mid-2024, and we’re seeing a similar scene unfold, but this time it’s AI that’s holding the reins. Tech stocks are once again the talk of the town, with AI technologies proving their significance across various sectors. These developments have investors bidding tech stocks to valuations north of 30X forward earnings, a level not seen since – that’s right – 1998.
This has raised murmurs of an ‘AI bubble’.
However, yesterday’s soft inflation report suggests that a cut in interest rates may be imminent, potentially by summer’s end. The market is pricing in approximately a 60% chance of a rate cut by September and is certain of at least one cut by November.
Just as in 1998, we believe that this combined with the excitement around AI advancements will trigger an influx of latent investor funds into tech stocks over the course of 2025 and 2026.
To put things in perspective, there’s a whopping $6 trillion in cash lying dormant in money market funds – a record-breaking figure.
Over the past two years, as the Fed has gradually increased interest rates, a substantial amount of money has been directed into money market funds. Their yields have been enhanced due to their partial investments in short-term debt securities, whose rates grow when the Fed increases rates. In fact, assets in these funds have grown by over $1.5 trillion in the last two years alone.
It seems quite evident to us.
Once the Fed commences reducing interest rates, a large chunk of that dormant money is likely to be redirected back into the stock market, more specifically into the red-hot tech stocks buoyed by AI developments.
We’re boldly predicting that tech stocks are about to relive the ’98 party!
And that’s not a underwhelming proposition. Between late 1998 to early 2000, the entire Nasdaq Composite shot up by over 250% – it more than tripled! Certain smaller stocks even soared higher. Our research indicates that there were over a dozen stocks that skyrocketed over 1,000% in 1999 alone.
In conclusion – if the tech stocks are about to echo the golden days of 1998, we recommend investing in top tech stocks without delay.
Invest some time in exploring our favorite picks to be on the forefront of this potential windfall.
Note: Luke Lango did not hold any positions, direct or indirect, in the securities mentioned in this article at the time of publication.
Postscript: Stay updated with Luke’s latest market insights by checking our Daily Notes! The latest issues are available on your Investing Pioneers or Early Stage Investor subscriber site.
Let us know what you think. Please share your thoughts in the comments below.
