Artificial intelligence (AI) stocks fueled stock market gains over the past two years as investors viewed AI as the next game-changing technology -- one that could join discoveries like electricity or developments like the internet.
On top of this, investors were feeling optimistic about the overall economy. The Federal Reserve was wrapping up its interest rate increases and on track to start lowering rates -- and this happened. The central bank launched rate cuts this past fall and indicated that more would follow. Against this backdrop, growth stocks also lifted benchmarks as these types of companies thrive in better economic environments -- it's easier for them to expand, and their customers generally have more money to spend on products and services.
All of this helped the Nasdaq advance more than 43% in 2023 and post a 28% increase last year. But in recent weeks, this sunny market environment has turned stormy. President Donald Trump announced tariffs on imports, a move that could weigh on prices, driving inflation higher and hurting corporate earnings. As a result, the Nasdaq fell into the correction zone, dropping more than 10% from its latest high in December. But here's the good news: Even though AI stocks are falling right now, they still remain a silver lining in this stormy market. Here's why.
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Nvidia and Palantir's double-digit declines
So, first, a quick look at some of the losses we've seen in recent times. Nvidia (NVDA +0.24%), the world's top AI chipmaker, tumbled 15% over the past month; AI software company Palantir Technologies sank 17% during that time period; and AI voice specialist SoundHound AI lost 12%. And the list goes on...
NASDAQ: NVDA
Key Data Points
Though these companies and technology and growth players in general may face headwinds in the near term due to economic uncertainty or a potential slowdown, it's important to keep in mind that AI prospects over the long term haven't changed. Analysts predict a compound annual growth rate of about 35% for the AI market through 2030 when they say it will reach more than $1 trillion.
And we have some concrete evidence that could happen. Companies from Meta Platforms (META 1.88%) to Alphabet (GOOG 0.04%) (GOOGL +0.01%) have announced increased spending to support their AI programs. Meta said it would spend as much as $65 billion this year and is planning to build a data center the size of part of Manhattan. Alphabet said it plans $75 billion in capital expenditures this year, and much of this will go toward servers, data centers, and networking.
The Trump administration is even getting in on the idea of boosting AI, applauding OpenAI's announcement of the Stargate project and pledging to help involved companies access the levels of electricity needed. Stargate, formed by OpenAI and several tech and financial partners, will invest $500 billion in the coming four years to build AI infrastructure in the U.S.
Encouraging words from Jensen Huang
Finally, words from one of the biggest authorities on AI also offer reason to be optimistic about the long-term growth story. Nvidia Chief Executive Officer Jensen Huang says that the world's data center build-out will cost $1 trillion, and demand for Nvidia's chip architecture Blackwell -- a key step forward in accelerated computing -- surpassed supply during its recent launch. These trends point to more growth ahead even if certain headwinds temporarily weigh on revenue or stock performance.
So, what does this mean for you as an investor?
Now is a fantastic time to get in on promising long-term players because today, many have fallen to bargain levels. For example, Nvidia now trades for 26 times forward earnings estimates, around its lowest in about a year. The stock has traded between 40 times and 50 times estimates for most of the past year.
"But what if these players decline further?" you may ask. It's impossible to time the market and get in at the very lowest price, so the best idea is to buy a stock when valuation looks cheap or reasonable. Even if it declines further, this won't change your returns by very much over time.
All of this means right now is a great time to consider AI stocks -- a silver lining in today's stormy market -- and snap up bargains that could supercharge your portfolio in this lasting AI growth story.
