Higher for longer interest rates won't derail the tech sector, Wedbush says

• Technology stocks can navigate a period of higher for longer interest rates, according to Wedbush.
• That's because there are strong underlying fundamental drivers like AI that should accelerate growth for the sector.
• Wedbush says it's eyeing the "biggest tech revolution we have seen in 30 years" on the horizon. 

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A period of higher for longer interest rates won't derail the technology sector, according to a Thursday note from Wedbush analyst Dan Ives.

The Federal Reserve signaled at the conclusion of the Federal Open Market Committee meeting on Wednesday that the central bank could hike interest rates one more time, and that potential rate cuts in 2024 will be less than what the market expected.

The rapid rise of interest rate in 2022 sparked a brutal sell-off for the technology sector as well as the broader market, but Ives believes tech is primed to withstand an extended period of elevated interest rates because its underlying growth drivers are too strong to ignore.

"Now is not the time to become scared by the Fed/macro backdrop and instead see the forest through the trees in the biggest tech revolution we have seen in 30 years on the doorstep that is bullish for tech stocks with the new tech bull market kicking off," Ives said.

And any future interest rate cuts, which the market currently expects at least two of next year, combined with the continued growth of artificial intelligence, should "create the start of a risk-on environment," Ives said.

"It's the rocket ship-like trajectory of AI driven growth that will hit the shares of the tech industry over the next 12 to 18 months that speaks to our unabated bullishness for tech stocks," Ives said. The potential of AI has already driven significant upside revisions to the earnings potential of tech companies including Nvidia, Microsoft, and Adobe, among others.

Ives cited that internal checks of enterprise IT spending suggests that overall spending in the tech environment is "modestly" improving, which bodes well for software stocks. "We also see an improving spending for software, chips, and digital media consumer growth into 2024," Ives said.

While Ives argument that tech stocks can perform well in the face of elevated interest rates might sound counterintuitive after the 2022 bear market, history suggests that it's more than possible.

Interest rates and technology stocks were negatively correlated throughout all of 2022, as interest rates rose and tech stocks fell sharply. But 2023 has been a different story, as the 10-year US Treasury rate has jumped 15% year-to-date to 4.49% while the Nasdaq 100 has jumped 35% year-to-date.

Technology stocks and interest rates were also positively correlated in the second half of 2020 and throughout most of 2021.