We recently compiled a list of The 10 Worst Artificial Intelligence (AI) Stocks to Buy According to Financial Media. In this article, we’ll look at how Arm Holdings (NASDAQ:ARM) stacks up against other AI stocks.
Is a 0.5% rate cut aggressive?
Analysts have long been predicting interest rate cuts, and the Fed just cut rates by 0.5% on September 18. This is the first rate cut since the pandemic, driven by concerns about the labor market, and followed by market volatility. The new benchmark rate is between 4.75% and 5.0%, with more cuts expected. Fed Chair Jerome Powell has said the cuts are based on economic data, not political factors.
Several analysts have either supported or opposed the 50 basis point rate cut, both before and after the final announcement. We recently discussed Potomac Wealth Advisors President Mark Avallone’s take on this aggressive move by the Fed. Here’s an excerpt from our article on the 50 basis point rate cut. The 10 Worst Small-Cap AI Stocks to Buy According to Short Sellerswhich covered his opinion:
“Mark Avallone said he was surprised by the Fed’s decision, but stressed that investors should not make impulsive decisions, but rather take advantage of potential opportunities in small- and mid-cap stocks, which he believes will benefit from a lower interest rate environment…. Avallone cautioned investors to be cautious about traditional banks, particularly mid-caps and large ones, based on his experience at Bank of America. He believes that recent changes in loan pricing after the Fed’s rate cut could hurt banks’ overall revenues and interest income…. He suggested that it may be too late to make significant changes in fixed-income investments, as many investors have already lengthened the duration of their bonds. He recommended holding off on any further adjustments until it is clear whether the rate cut is due to an economic slowdown or a preemptive move.”
After announcing that the central bank had cut interest rates by half a percentage point, Fed Chairman Jerome Powell took questions from reporters about this first rate cut since 2020. He stressed the Fed’s commitment to adjusting monetary policy in a timely manner, particularly in light of the current economic environment. The Fed believes it is not behind schedule, and the rate cut decision reflects a firm commitment to avoiding falling behind.
Asked whether the rate cut was influenced by recent employment data or the high nominal level of the federal funds rate, he clarified that their policy stance was set in July 2023, a period characterized by high inflation and low unemployment. He emphasized their patience in reducing the policy rate, noting that other central banks had already implemented multiple cuts while the Fed had refrained from such actions so far. That patience has reportedly paid off, as there is now greater confidence that inflation is sustainably trending toward the 2% target.
Powell said the recent rate cut should not be interpreted as a new pace for future adjustments, but rather as part of a recalibration of policy toward a more neutral level. He referred to the Summary of Economic Projections (SEP) as a guide to understanding potential future cuts, emphasizing that economic developments could lead to adjustments in either direction.
Asked about the implications of the deeper rate cut for balance sheet policy, he said that the banking system’s reserves remained stable and ample. He said there were no plans to stop balance sheet reduction following the move, indicating that monetary policy easing and balance sheet management could be done simultaneously.
In a lower interest rate environment, investors around the world are looking to either make a decision on their current AI stock holdings or diversify their portfolios with a higher ratio of AI stocks. But what was the real impact of the September rate cut on the AI sector? Cory Johnson, chief market strategist at Futurum Group, just discussed the impact of Fed rates on the tech sector as it invests more in artificial intelligence.
The Fed’s recent decision to cut interest rates has triggered a ripple effect in the tech sector, which could lead to increased tech spending and potentially greater venture capital investment. Corey Johnson noted that the current environment is favorable for tech stocks.
Johnson noted that tech stocks went through a reset when the Fed didn’t respond as quickly as investors would have liked. However, with the recent decline, there appears to be a new coupling between tech stocks and market sentiment. Even a 50 basis point cut can facilitate borrowing and spending, leading to increased M&A. He said this trend will likely translate into increased investment in technology, particularly AI.
He also noted that lower interest rates could accelerate the transition to AI by making capital more accessible to companies looking to invest in the field. Johnson said that as rates fall, expected returns on investments look more attractive, particularly in growth sectors like technology. This could lead to greater confidence among companies to invest in AI.
On the venture capital front, Johnson noted that there is a lot of activity in the Bay Area, particularly with semiconductor startups. He noted that there have been a lot of new projects announced recently, indicating a strong interest in the sector. He noted that securing funding often happens before a product is fully developed, so investors are increasingly focused on building the right teams rather than simply producing a finished product.
Overall, Johnson’s observations reflect a positive outlook for tech spending and venture capital investment in light of the Fed’s rate cuts, particularly in the AI and semiconductor sectors. As companies adjust to changing financial conditions, Powell’s discussion of the Fed’s strategic approach presents investors with both opportunities and challenges. We’re here to help you navigate the situation with a checklist of The 10 Worst Artificial Intelligence (AI) Stocks to Buy According to Financial Media.
Methodology
To compile our list, we combed through AI stock rankings on various financial media websites to compile a list of 20 possible AI stocks. We then selected the 10 stocks that were least popular among elite hedge funds and on which analysts were pessimistic. The stocks are ranked in descending order of the number of hedge funds holding them, as of Q2 2024.
Why do we care about the stocks that hedge funds are heavily invested in? The reason is simple: Our research has shown that we can outperform the market by mimicking the best stock picks of the best hedge funds. Our quarterly newsletter strategy selects 14 small- and large-cap stocks each quarter and has returned 275% since May 2014, outperforming its benchmark by 150 percentage points (msee more details here).
A cutting-edge semiconductor chip on a computer robot arm, reflecting the company’s technological advancements.
Arm Holdings (NASDAQ:ARM)
Number of hedge fund holders: 38
Arm Holdings (NASDAQ: ARM) is a semiconductor and software design company that licenses its technology to other companies for use in their products. It specializes in designing low-power processors and other components that are used in a range of devices, including smartphones, tablets, and IoT devices, using AI to enable features such as machine learning, natural language processing, and computer vision.
The company has recently gained market share in the automotive and cloud services sectors, although it faces challenges in the IoT and networking equipment areas due to inventory adjustments in the industrial sector.
First quarter 2025 revenue increased 39% year over year to $939 million, the highest quarterly revenue to date. License revenue increased 72% and royalty revenue increased 17% year over year. Adoption of Armv9 and the recovery in the smartphone market drove royalty revenue growth. Smartphone royalty revenue increased more than 50% year over year, even though unit sales increased only slightly.
The iPhone 16, powered by Arm Holdings’ (NASDAQ:ARM) A18 chip, highlights its leadership in mobile and AI technologies. This partnership around the iPhone 16 has led to a 60% increase in its stock price in 2024.
The company was also added to the PHLX Semiconductor Sector Index (SOX) this week, reflecting its rapid growth and diversification as a core computing platform across a variety of technologies.
Arm Holdings’ (NASDAQ: ARM) launches of the Axion processor and Ethos-U85 for edge AI demonstrate its leadership in the growing AI market. Windows on Arm PCs and continued demand for compute subsystems in mobile, cloud and automotive further strengthen its leadership position in the technology ecosystem. With a network of approximately 20 million software developers, the company is well positioned for growth.
ARM global ranks 8th on our list of the worst AI stocks to buy according to the financial media. While we recognize ARM’s potential as an investment, our conviction lies in the belief that AI stocks have great promise to deliver high returns and do so in a shorter time frame. If you’re looking for an AI stock that has more promise than ARM but is trading at less than 5x earnings, check out our report on the the cheapest AI stock.
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Disclosure: None. This article was originally published on Insider Monkey.