Tech stocks have seen a stupendous rally this year helped by compelling valuation, a less-hawkish Fed and ChatGPT-induced Artificial Intelligence (AI) hype. While valuation is not still sky-high and the Fed is less likely to turn aggressive in the coming days, the AI story will pull the strings of any tech rally in the medium term.

Three months after AI enthusiasm sent stocks into a new bull market during first quarter earnings calls, AI still remains the biggest catchword of the second-quarter earnings season. But what’s coming out?

Full-Fledged AI Boost Will Take Time to Materialize

While Meta, Microsoft and Alphabet are all about AI, Apple still doesn’t seem to be into it and will need to be more aggressive in enunciating the strategy, per tech investor Paul Meeks, as quoted on CNBC. Microsoft already told investors that growth from its AI services will be “gradual.”

Microsoft CFO Amy Hood said on the company’s earnings call, “the impact of [AI] will be weighted towards [the second half of the 2024 fiscal year].” Still, Meta and Alphabet kept hopes alive and both stocks gained (unlike Microsoft) post releasing their earnings.

And Microsoft’s version does make sense. “It’s not going to be overnight,” Jefferies senior analyst Brent Thill told Yahoo Finance Live.  Uber CEO Khosrowshahi explained it nicely saying, “the large language models [that ChatGPT is famous for] are more focused on text and pictures, et cetera…So they’re not as extensible at this point into problems like pricing, matching, routing.”

Agreed, Alphabet mentioned AI 66 times on this quarter’s earnings call, up from 58 last quarter and just 8 mentions in the first quarter of 2021 (per the analysis from Bespoke Investment Group, as quoted on Yahoo). Still, the gamechanger is not going to knock on the door overnight.

Time to Shy Away From Big Tech & Focus on Broader Market ETFs?

Kenny Polcari of SlateStone Wealth expects a pullback of U.S. big tech stocks, as quoted on CNBC. In July, the S&P has experienced a 3% increase, marking its fifth successive positive month. You can give this credit to AI again as the S&P 500 is heavy with AI companies like META, GOOGL, MSFT and Tesla.

However, one must not forget that the blue-chip Dow rose by 3.1% in July. The small-cap index Russell 2000 jumped about 4.9% last month while the S&P 600 popped 4.5% (as of Jul 28, 2023). This happened even amid stressed U.S. manufacturing sector as evident from back-to-back lackluster data.

The services sector has been taking an upper hand, probably. GDP growth is at great shape. So is the jobs market. Investors can take a bite of out of these new-found optimism in the form of more broader market ETFs.

ETF Picks

These ETFs have a Zacks Rank #2 (Buy) or Zacks Rank #1 (Strong Buy). These ETFs also have a P/E less than that of the S&P 500 (i.e. 17.86X).

SPDR Portfolio S&P 500 High Dividend ETF SPYD – Zacks Rank #2; P/E: 12.44X

Vident U.S. Equity Strategy ETF VUSE – Zacks Rank #2; P/E: 13.99X

Vanguard S&P Small-Cap 600 ETF VIOO – Zacks Rank #1; P/E: 11.80X

Invesco S&P 500 Enhanced Value ETF SPVU – Zacks Rank #1; P/E: 8.63X

Invesco Dividend Achievers ETF PFM – Zacks Rank #2; P/E: 16.77X

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Vident U.S. Equity Strategy ETF (VUSE): ETF Research Reports

Vanguard S&P Small-Cap 600 ETF (VIOO): ETF Research Reports

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