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5 'Strong Buy' AI Stocks That Could Benefit from a Fed Rate Cut

Pathikrit Bose - Barchart - Tue Sep 17, 10:16AM CDT

As Fed Chair Jerome Powell and Co. kick off their two-day Federal Open Market Committee (FOMC) meeting, market participants are waiting with bated breath to find out about rate cuts - not whether we'll get one, but how big it will be. The Fed has clearly signaled it's ready to ease, but a recent string of softer economic data has stirred up speculation over a bigger-than-normal cut of 50 basis points, rather than the standard 25 bps.

As a result, the CME FedWatch tool is showing an unusual lack of consensus ahead of Wednesday's policy decision, with fed funds futures traders strongly divided on the size of the expected rate cut. That means there's likely to be some significant stock market volatility around the Fed decision tomorrow, making it a risky time to place any bets around the expected outcome.

However, for investors seeking stock picks set to benefit from lower rates over the long haul, Wedbush analysts led by Dan Ives are calling out the bullish prospects for artificial intelligence (AI) stocks. AI leaders have already created massive wealth for investors over the last two years in a high interest-rate environment, and the analysts say they expect that to continue as the Fed steers toward a soft landing for the U.S. economy: "In a nutshell, we believe the stage is set for tech stocks to move higher into year-end and 2025 in our opinion as the Fed and Powell kick off its rate-cutting cycle this week, macro soft landing remains the path, and tech spending on AI remains a generational spending cycle just starting to hit the shores of the tech sector," they wrote.

For investors seeking top-quality picks in the AI niche, here are five industry-leading names that have earned consensus “Strong Buy” ratings from analysts.

#1. Nvidia

If there has been any single company that has been representative of the AI juggernaut, it's Santa Clara-based Nvidia (NVDA), the designer and seller of specialized GPUs. Their products are used in a wide range of industries, including data centers, gaming, professional visualization, and automotive, among others. The company's rapid growth has propelled it into the multi-trillion dollar club, with a massive market cap of $2.87 trillion.

Up an eye-popping 2,619% over the past five years, the stock's stellar run has continued in 2024, up 137% on a YTD basis. NVDA stock also offers a modest dividend yield of 0.03%.

Overall, analysts have deemed NVDA stock a “Strong Buy,” with a mean target price of $149.22. This denotes an upside potential of about 26.6% from current levels.

Out of 39 analysts covering the stock, 34 have a “Strong Buy” rating, 2 have a “Moderate Buy” rating, and 3 maintain a “Hold” rating.

#2. Microsoft

Co-founded by Bill Gates almost five decades ago, Microsoft (MSFT) began as a small software startup, and has since grown into a multinational technology company that develops, manufactures, licenses, supports, and sells computer software, consumer electronics, personal computers, and related services. Microsoft's key products have become household brand names over the years, including Windows, MS Office, Azure, and Xbox. The company commands a gargantuan market cap of $3.2 trillion, second only to Apple's (AAPL).

MSFT stock is up 16.4% on a YTD basis, and it also offers a dividend yield of 0.72% - which is fairly modest, though it's backed by roughly two decades of consistent growth.

Analysts have given MSFT stock an overall rating of “Strong Buy,” along with a mean target price of $499.58. This indicates an upside potential of roughly 14.3% from current levels. Out of 39 analysts covering Microsoft stock, 35 have a “Strong Buy” rating, 3 have a “Moderate Buy” rating, and 1 says it's a “Hold.”

#3. Advanced Micro Devices

Founded in 1969 and headquartered in the tech hub of Santa Clara, Advanced Micro Devices (AMD) is a behemoth in the semiconductor industry, commanding a market cap of $245.8 billion. As one of the world's largest suppliers of microprocessors and related technologies for the computing and graphics industries, AMD's products are used in a wide range of applications, including personal computers, servers, workstations, embedded systems, and gaming consoles.

AMD stock is up just 3.5% on a YTD basis, and more than 50% year over year.

Overall, analysts have a consensus rating of “Strong Buy” for AMD stock, along with an average price target of $192.88 - indicating expected upside potential of about 26% from current levels. Out of 36 analysts in coverage, 29 have a “Strong Buy” rating and 1 has a “Moderate Buy,” while 6 have a “Hold” rating.

#4. ServiceNow

Another Santa Clara native, ServiceNow (NOW) is a cloud-driven IT services management company with a market cap of $182.9 billion. ServiceNow harnesses the power of machine learning to predict future adverse IT-related outages or breakdowns, automate IT processes, and for data analysis to gather insights into IT operations.

In 2024 so far, NOW stock has gained 26.6%.

Overall, Wall Street rates the stock a “Strong Buy." Out of 33 analysts covering NOW, 28 have a “Strong Buy” rating, 2 have a “Moderate Buy,” 2 recommend a “Hold,” and 1 has a “Strong Sell” rating. The shares have already outrun their average 12-month price target of $871.81, while the Street-high target of $950 is about 6% overhead.

#5. Dell

Founded in 1984 by Michael Dell, who was then still a student at the University of Texas, Dell Technologies (DELL) has gone on to become one of the world's largest technology infrastructure companies. The company designs, develops, manufactures, and sells a wide range of computer-related products and services. This includes PCs, servers, data storage devices, and networking equipment, among others.

DELL, which is set to join the benchmark S&P 500 Index ($SPX) at the start of next week's trading, currently carries a market cap of $81.8 billion.

Up a whopping 52.6% on a YTD basis, Dell stock also offers a competitive dividend yield of 1.54%.

Analysts have an average rating of “Strong Buy” for DELL stock, with a mean target price of $148.69. This indicates expected upside potential of about 27.6% from current levels. Out of 17 analysts covering Dell, 12 have a “Strong Buy” rating, 2 say it's a “Moderate Buy,” and 3 maintain a “Hold” rating.

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On the date of publication, Pathikrit Bose did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.