After anticipating an imminent Fed rate cut, Wall Street started to waver from late last week on renewed cues of a hawkish Fed. Investors should note that the Fed’s latest minutes indicate worries over the lack of progress on inflation.

The minutes also showed that various participants showed a willingness to tighten policy further to handle sticky inflation. The meeting revealed that inflation was more stubborn than officials had expected to start 2024. This means that the rates are likely to remain higher for longer.

This scenario is negative for growth sectors like information technology as the space underperforms in a rising rate environment. Since the growth sector relies on easy borrowing for superior growth and its value depends heavily on future earnings, a rise in long-term yields cuts the present value of companies’ future earnings.

But we’ll highlight here why tech ETF areas are likely to remain strong no matter what happens in the broader economy and regardless of the Fed’s imminent decision regarding interest rate policy. Investors should note that the Nasdaq topped 17,000 for the first time ever on Tuesday, boosted by gains in NVIDIA (NVDA Quick QuoteNVDA - Free Report) .

Is the Worry for Higher Rates Exaggerated?

We believe that no matter whether the Fed hikes, pauses, or cuts rates, tech investing will be in fine fettle this year due to the AI boom and the perception that the era of rock-bottom rates is over. Both tech and higher rates are the new normal, and investors are getting accustomed to it.

Strong AI-Led Long-Term Future for Tech

“New normal” trends like work-and-learn-from-home and online shopping, increasing digital payments and growing video streaming are sure to stay here even if the pandemic has ebbed. The growing adoption of cloud computing, and the ongoing infusion of AI, machine learning and IoT are the other winning areas.

We can definitely witness some occasional hits and misses in AI integration and monetarization, but the long-term future is bullish. The global artificial intelligence market size is projected to experience a compound annual growth rate (CAGR) of 37.3% from 2023 to 2030, per GrandViewResearch, as quoted on Forbes.

Some budding areas like AI, and the still-nascent areas like metaverse, may be causing companies cash outflows now, but these initiatives could turn out to be the future of the tech sector, if executed properly.

Latest AI Frenzy Is Not Same As 2000’s Tech Bubble

The dramatic rise in big tech companies won't come to an end like what the industry saw after the tech boom of the 1990s, according to some analysts, quoted on Wall Street Journal last year. Per some of them, AI is the most significant tech revolution we've seen in three decades while some commented that the 1990s saw companies invest in a Field of Dreams-esque. But AI transformation is hard-core reality.

Nvidia CEO Jensen Huang highlighted the unprecedented and broad-based demand for the company's AI chips, citing a shortage in supply rather than a lack of interest from customers, an exclusive interview with Yahoo Finance. 

According to Huang's estimate, the value of data centers within cloud and enterprise software systems is around $1 trillion. Taiwanese contract chipmaker TSMC expects an annual revenue growth of 10% in the global semiconductor industry, excluding memory chips due to AI push. More importantly, the demand is generating from not only the cloud service provides, every area of the society – be it pharma, auto or energy sector – has been splurging on AI initiatives.

ETFs to Benefit  

Against this backdrop, investors can keep a close watch on tech ETFs like Strive U.S. Semiconductor ETF (SHOC Quick QuoteSHOC - Free Report) , iShares U.S. Technology ETF (IYW Quick QuoteIYW - Free Report) , First Trust NASDAQ Technology Dividend Index Fund (TDIV Quick QuoteTDIV - Free Report) , Invesco S&P 500 Equal Weight Technology ETF (RSPT Quick QuoteRSPT - Free Report) and First Trust Expanded Technology ETF (XPND Quick QuoteXPND - Free Report) .