The war with Iran brought about a major shift in the stock market.
While energy stocks have (not surprisingly) gotten a boost, there has been a general rotation out of technology and large-cap growth stocks and into value and small-cap stocks. Part of this can be because of fears that a prolonged conflict could eventually lead to a global recession. In these periods, value stocks generally tend to outperform.
The other reason for the rotation out of tech stocks is the fear that the artificial intelligence (AI) infrastructure boom could be peaking. The five largest hyperscalers (owners of large data centers) are set to spend around $700 billion on AI infrastructure this year. That's more than the gross domestic product of all but two dozen countries. As such, it's not crazy to think this spending needs to slow down and can't continue forever.
Meanwhile, some investors have questioned the return on these AI investments and the lifespan of these chips. However, Alphabet (GOOGL 0.89%)(GOOG 0.87%) has said that its seven- to eight-year-old tensor processing units (TPUs) remain 100% utilized, while neocloud provider CoreWeave has said that its five-year-old graphics processing units (GPUs) are still fully booked.
The rental rate on these chips is down 70% from peak levels, but they are still generating revenue, and older-generation chips are often transitioned from high-intensity training to inference.
Image source: Getty Images
With all the major cloud computing providers being capacity-constrained and spending huge amounts on AI infrastructure, it's difficult to believe that these companies are not getting good returns on their spending.
What I think most validates this is that the leading foundry, Taiwan Semiconductor Manufacturing (TSMC for short), greatly upped its own capital expenditures (capex) to increase its capacity to produce advanced chips. This is huge because there is no company with more at stake than TSMC. If Alphabet and Microsoft overspend on AI data centers, that's just a small blip. If TSMC builds a lot of fabrication facilities that are going to sit idle, that's a major blow to its entire business.
The company did not make its spending plans lightly, and most certainly got a clear picture of the long-term economics of the AI cloud computing business. Right now, AI is a race, but it is also a profitable one for companies throughout the entire system. Chip obsolescence is real, but you can be sure the largest companies in the world aren't all spending completely frivolously.
That is why I'm buying tech growth stocks while the market is panicking. Here are some of my favorites.
Alphabet and Amazon: The cloud giants
Alphabet and Amazon (AMZN +1.51%) are two of the companies spending heavily on AI infrastructure, and both are seeing strong growth in their cloud computing units. Amazon has one of the best histories of turning heavy investment cycles into strong, durable profit growth, while few companies have been at the forefront of innovation as much as Alphabet.
NASDAQ: GOOGL
Key Data Points
Alphabet has gained a big cost edge over most of its competitors by having developed its own top-tier AI chips. It is smartly pressing this lead through its data center investments. And while Amazon's chips are not on par with Alphabet's TPUs, the company has created its own custom chips, which it has used to power a large data center from Anthropic.
Broadcom and AMD: Riding favorable trends
Two other AI growth stocks I've added are Broadcom (AVGO +0.47%) and Advanced Micro Devices (AMD +2.85%), since both companies have trends working in their favor. For Broadcom, it's the increase in chip cluster sizes, which is benefiting its networking portfolio, and the gradual shift toward custom AI chips. The company helped Alphabet develop its TPUs, and now other companies are rushing to develop their own custom chips with its help.
NASDAQ: AVGO
Key Data Points
AMD, meanwhile, is set to benefit from agentic AI evolution. The company is the leader in server central processing units (CPUs), and data centers are going to need a lot more CPUs in the coming years to handle the needs of AI agents. This is a huge trend that should help fuel AMD's growth.
Growth continues to be where to invest
Growth stocks have easily outperformed value stocks for much of the past two decades. While value stocks will have their strong stretches, growth is still what will power the market over the long term.
