Why Artificial Intelligence (AI) Stocks Broadcom, TSMC and Arm Holdings Soared Today

Artificial intelligence (AI) stocks rose today in response to the Federal Reserve’s decision yesterday to cut benchmark interest rates by 50 basis points.

The federal funds rate is now 4.75%-5%, and the central bank has signaled it will cut rates twice, by 25 basis points each time, before the end of the year.

While stocks were volatile after yesterday’s announcement, investors cheered the news this morning, with major stock indexes surging. The S&P 500 increased by 1.5% and the Nasdaq up 2.3% as of 10:09 a.m. ET. Growth stocks and those dependent on capital investment, such as AI stocks, have done particularly well.

Among the winners were Broadcom (AVGO 5.28%)which increased by 4%; Taiwan Semiconductor (TSM 5.42%)which had increased by 4.3%; and Arm holds (ARM 2.63%) which also grew by 4.3% over the same time.

The VanEck Semiconductor ETF (SMH 5.11%) also rose 4.2 percent, showing gains were broad-based in the chip sector.

Image source: Getty Images.

Why AI Stocks Soared Today

Semiconductors and AI stocks are a sensitive, cyclical sector in any type of market environment, but this is especially true in the current one as there is much uncertainty around the strength of the economy, the sustainability of AI investments and valuations in the sector. .

However, lower interest rates help ease concerns on all these fronts, especially as the central bank surprised some investors by cutting rates by 50 basis points instead of 25 bps, showing it wants to stay ahead of the date curve this.

Broadcom is a diversified technology company with exposure to cybersecurity, virtualization software, custom semiconductors, Ethernet switches and networking chips, and AI. The company expects to generate $12 billion in AI revenue this year.

Broadcom is known as a prolific acquirer of businesses, buying VMware late last year, and the lower fees will make it easier for the company to finance future acquisitions. Lower rates could also lower Broadcom’s interest rate or help it refinance its debt, as the company now has $66.8 billion.

In addition, Broadcom’s customers will benefit from lower borrowing costs, making them more willing to invest in chips and other technology infrastructure.

Taiwan Semiconductor may be the biggest pivot in the tech industry. It is the largest contract manufacturer of semiconductors in the world, handling production for companies such as Apple, NvidiaBroadcom and AMD. It’s a cyclical business, and low interest rates could support spending and demand for its big companies, especially Apple, which accounts for about 25 percent of its revenue, as the iPhone maker is sensitive to consumer spending and demand.

TSMC is also in the process of building massive foundries around the world and will need billions of dollars to do so. Lower borrowing costs, at least in the US, will make it easier for them to do so.

Finally, Arm Holdings is in a similar position to TSMC as a key supplier to partners like Apple and Nvidia. However, Arm is not a manufacturer. It licenses its chip designs, such as CPU architecture, to companies such as Apple. In fact, the iPhone is estimated to account for roughly half of royalty revenue today, so an increase in iPhone spending is a win for Arm. In particular, Apple stock is up about 4% this morning.

Similarly, the company also has increasing exposure to AI technologies in data centers and elsewhere, and the lower rates should help boost investment in those areas, including Arm technology. for the benefit of the company.

What’s next for AI stocks?

With interest rates expected to fall further this year and next, this should provide a tailwind for these three stocks and help ease concerns about a recession, which should also boost more the AI ​​sector.

While there are valid concerns about valuations and the strength of end-user demand for new AI technologies like ChatGPT, the cloud infrastructure giants have signaled their willingness to continue spending on AI infrastructure, which should support the growth of Broadcom, TSMC and arm.

With monetary policy loosening, AI shares look poised for another move higher.