How AI is Reshaping the tech sector

By | May 29, 2023

The tech sector has been up more than 27 percent year-to-date, driven in part by the excitement around artificial intelligence (AI) as the technology reshapes the sector.

The Excitement Around Artificial Intelligence in the Tech Sector

The tech sector has been up more than 27 percent year-to-date, driven in part by the excitement around artificial intelligence (AI) as the technology reshapes the sector. But where should you place your bets? Let’s hear from Omar Aguilar, Schwab Asset Management CEO and CIO.

The Spike in NVIDIA

Aguilar acknowledges that the spike in NVIDIA is a great story and AI has provided a significant amount of tailwinds for the technology sector. This has generated enough stability for the rest of the market. Investments in AI have generated revenue and many corporations with a lot of cash in their balance sheets are trying to get into the race to have something related to AI. With that level of excitement in investments, it is a good way to deploy assets so that you can potentially have those future areas. As we know, in those particular cases, it is all about growth and future potential.

Momentum and Narrow Leadership in the Market

The rally that we have seen in equities through 2023 has been driven by a small number of stocks, particularly in the large cap space. Extracting tech away from the rest of the market would give a more realistic scenario of what the macro conditions will tell us and what is going to drive security performance over the next six months. A big part of this is that there is going to be momentum, but it is going to be fairly narrow in certain parts, particularly AI. The breadth of the market is something that we need to continue to pay attention to, especially as we continue to see changes in the landscape, particularly in consumer spending.

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Fundamental Shifts in the Narrative

When it comes to something like the consumer and the retail space, the biggest shift that Aguilar has seen is that the economy as it is today, especially related to the consumer, is less interest rate sensitive than what the original thought was. The lag in terms of the sensitivity of the consumer to interest rates seems to be growing and has been an area of concern. While there are still savings out there, it is still in the consumer and has been completely focused on the high earners as opposed to the rest of the economy.

Debt Ceiling Negotiations and Potential Fallout

The market understands what it means to have the US on a downgrade and we should expect short-term volatility to take place if the US is downgraded. The credit downgrade is not going to be as critical as if the US were to go into an actual default. While the credit downgrade may not be as welcome to anybody, it still is not going to be as critical as if anything happens now. Aguilar notes that there is still uncertainty about having a debt ceiling agreement. Short-term yields are currently reflecting this fact, with a significant amount of premium being paid at the moment.

The Fed as the Primary Driver

The Fed is still a primary driver of market action, with expectations in favor of a 25 percentage point hike to interest rates at the upcoming June FOMC meeting. Aguilar expects that the Fed will raise interest rates in order to fight inflation.

Assessing the Economy and Investment Opportunities

The economy has proven to be resilient with recent GDP revisions and unemployment claims, providing support for the Fed’s actions against inflation. However, the question remains whether a 25 basis points increase in rates will have an upside or downside on inflation. The banking crisis has led to tight lending standards, creating a challenging market environment. As a result, our position is a 50/50 chance for a hawkish pause or a potential 25 basis points increase.

Investors can take advantage of uncertainty and potential short-term volatility by focusing on long-term investments and rebalancing portfolios. With the potential for short-term rates to reach the terminal rate, it’s worth considering increasing duration in fixed income portfolios. 

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