Internet Infrastructure Stocks Surge Amid AI Excitement and Lower Interest Rates

The theme of Internet Infrastructure Stocks has gained over 44% so far this year. In contrast, the S&P 500 is up about 25% during the same time. This impressive performance is largely fueled by enthusiasm for generative artificial intelligence technologies. Companies like Nvidia (NASDAQ: NVDA) and AMD (NASDAQ: AMD) have seen significant gains. Other players in the computing ecosystem, including memory manufacturers such as Micron (NASDAQ: MU), also enjoyed meaningful success. Moreover, tech stocks, especially those linked to AI, experienced a slight uptick following the recent U.S. election results.

Trump’s Potential Impact on AI Development

Donald Trump’s anticipated victory in the 2024 election, combined with a Republican-controlled Congress, may benefit tech companies investing heavily in generative AI. Unlike the Biden administration, which aimed for stricter regulation of AI technologies, Trump’s strategy could focus on reducing restrictions and promoting deregulation. Such a shift may lessen compliance burdens, accelerating innovation in the tech sector and increasing the demand for AI infrastructure components from companies like Nvidia, AMD, and Micron. Furthermore, Trump’s plan to boost energy production could enhance the availability and pricing of electricity for AI data centers, further supporting AI initiatives.

Interest Rate Cuts Favor Growth Sectors

In September, the Federal Reserve cut interest rates for the first time in four years, reducing them by 50 basis points. A second cut of 25 basis points followed shortly after, decreasing the benchmark federal funds rate to a range of 4.50% to 4.75%. This creates potential for additional cuts. Although the president does not directly control monetary policy, Donald Trump has a history of advocating for lower interest rates to stimulate economic growth. Explore our analysis on ways to profit from future Fed decisions. Lower interest rates generally benefit growth sectors such as technology, which rely on higher future earnings projections as discount rates decline.

The Effects of Lower Rates on Internet Infrastructure

The lowering of interest rates offers substantial advantages to the broader internet infrastructure theme. A reduced rate environment can cut financing costs for large data center construction, encouraging capital expenditure and supporting companies like Nvidia, Micron, and AMD. The artificial intelligence revolution faces hurdles related to high training and inference costs; declining interest rates may improve the payback period for those investments.

Historic Volatility of Internet Infrastructure Returns

The performance of the Internet Infrastructure theme over the past three years has shown significant volatility compared to the S&P 500. For instance, annual returns were 45% in 2021, -38% in 2022, and a remarkable 68% in 2023. Conversely, the Trefis High Quality (HQ) Portfolio—consisting of 30 stocks—has consistently outperformed the S&P 500 each year during this period. This stability is attributed to the HQ Portfolio delivering better returns with less risk. Given the current economic climate, characterized by rate cuts and geopolitical tensions, could this theme replicate its 2022 underperformance against the S&P 500, or will it experience a rebound?

Valuations and Future Growth Prospects

The long-term trend toward digitalization should stimulate growth in the internet infrastructure sector, but current high valuations may make short-term investments less appealing. Nvidia has been the standout performer in this space, with a 200% rise in stock value over the past year, driven by soaring demand for graphics processing units. In contrast, Cisco (NASDAQ: CSCO) has lagged, with a modest 15% return over the same timeframe. Interestingly, Nvidia recently surpassed Apple as the world’s most valuable company and is set to join the Dow Jones Industrial Average this Friday.

[1] Returns as of 11/8/2024
[2] Cumulative total returns since the end of 2016

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The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.