The conventional wisdom suggests that rising interest rates negatively impact technology stocks and other growth stocks, making borrowing money to finance rapid growth more expensive. However, recent history indicates otherwise.
Historical Impact on Technology Stocks
Technology stocks tend to decline in the early stages of downturn cycles, but they recover and regain losses later. The Nasdaq 100 index – which is a group of the largest technology stocks traded on Nasdaq – rose during each of the previous four downturn cycles of the U.S. central bank, outperforming the S&P 500 in three of those cycles.
Among these cycles, the remarkable upswing of 59% during the period from 1999 to 2000 coincided with the final stages of the online stock market rally, despite its collapse after the central bank finished raising interest rates. There was also a 36% rise between December 2015 and the same month in 2018 when accelerating economic growth prompted the central bank to raise interest rates from historically low levels.
The Nasdaq 100 index fell a quarter from March through the end of December last year, but it regained its level and rose by 5% compared to where it was before the central bank started raising interest rates.
In early 2016, during previous downturn phases, the index fell 14% over two months following the first interest rate hike amid a broader correction in the stock market, but it fully regained its losses by July, rising throughout a series of eight interest rate hikes over the next two and a half years, finishing more than a third higher than its level before the downturn process began.
Artificial Intelligence May Be the Biggest Transformative Event in Decades
History may not be the only factor supporting technology stocks. Analysts at Wedbush Securities believe that technology stocks could outperform “higher for longer” interest rates thanks to the revolution in artificial intelligence – which they believe is the biggest transformative event in the tech industry since the internet boom of the 1990s.
Analysts cited the increased use of artificial intelligence by companies and said we might be entering the next phase of massive spending on AI, pointing to the dominance of major tech companies like Google, Microsoft, Amazon, and Nvidia, which have invested heavily in AI and could be among the biggest beneficiaries.
Do you have news tips for Investopedia journalists? Please email us at tips@investopedia.com
Leave a Reply