Thanks in part to yesterday’s soft May inflation report, we think the U.S. Federal Reserve is set to cut interest rates by September. In fact, we think the central bank will deliver multiple rate cuts into the end of the year. And if so, tech stocks are likely on the cusp of a massive ‘melt-up’ over the next few years.
What’s fueling our bullishness? How similar the current market situation is to that of 1998.
Back in early ‘98, internet euphoria made tech stocks red-hot. New internet technologies were emerging everywhere and proving their significant value. Investors were excited by these new technologies and started bidding up tech stocks to valuations north of 30X forward earnings. (Before this time, they had never traded above 30X forward earnings.)
Lots of investors were calling it an internet bubble.
But then… in late summer 1998… the Fed cut interest rates, unlocking a flood of pent-up investor money that rushed into tech stocks. And from late 1998 to early 2000, tech stocks proceeded to soar more than 250% in what was one of their best runs ever!
And now we’re seeing ample parallels between the tech-stock surge of ‘98 and our present-day setup.
The Past Predicts the Future for Tech Stocks
Here in mid-2024, tech stocks are red-hot thanks to AI euphoria. New AI technologies are emerging everywhere and proving their significant value. Investors are excited by these new technologies and have started bidding tech stocks up to valuations north of 30X forward earnings for the first time since – you guessed it – 1998.
Lots of investors are calling this an AI bubble.
But… after yesterday’s super-soft inflation report… it seems the Fed is primed to cut interest rates later this summer. The market is now pricing in about 60% odds of a rate cut by September and 100% odds of a cut by November. In other words, the market now sees the Fed cutting rates twice by the end of the year.
And just like they did in 1998 with internet euphoria, we believe these incoming rate cuts will couple with AI euphoria to unlock a flood of pent-up investor money that will rush into tech stocks throughout 2025 and ‘26.
After all, there is a record $6 trillion in cash sitting on the sidelines in money market funds.
Over the past two years, as the Fed has hiked interest rates, a ton of money has moved into money market funds because higher rates have increased those funds’ yields (since they invest partially in short-term debt securities, whose rates go up when the Fed hikes rates).
Indeed, total assets in money market funds have increased by more than $1.5 trillion over the past two years.
The Final Word
Folks, the evidence seems pretty clear to us.
Once the Fed starts cutting interest rates, a lot of that money will likely shift back into the stock market. And, specifically, it’ll flow into red-hot tech stocks supported by AI euphoria.
That means tech stocks are about to party like it’s 1998 all over again.
And that’s a really exciting proposition. In fact, from late 1998 to early 2000, the entire Nasdaq Composite rose more than 250%. The entire index more than tripled!
And certain smaller stocks soared even higher than that. Our research suggests more than a dozen stocks rose over 1,000% in 1999 alone!
So… if tech stocks really are about to party like it’s 1998 all over again… then you need to invest in the top tech stocks right now.
Check out a few of our favorite picks to get prepared today.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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