Meme stocks are back on the move again

Meme stocks have joined the 2023 stock market rally.

Since the S&P 500’s (^GSPC) recent low on Oct. 27, the Roundhill Meme ETF (MEME) is up 15.2% while the Global X Robotics and AI ETF (BOTZ) is up 17.4%. Both are outpacing the recent 10% surge in the S&P 500 and have also produced higher returns than the benchmark for the year.

Each area has recently jumped, surfing a market rally that’s benefited many of the pockets of the market that were crushed in 2022, like growth-stage tech.

Unlike Big Tech, however, whose big 2023 has been largely from AI hopes, the Fed and the light at the end of the rate-hike tunnel play the key role.

“‘Meme stocks’ tend to be unprofitable so they especially benefit from lower rates since they have an even greater need to raise capital at reasonable prices,” explained DataTrek co-founder Jessica Rabe in a note on Monday night.

To Rabe, the resurgence of meme stocks sends a clear message to investors.

“Meme stocks’ current positive momentum shows investors’ animal spirits are starting to run hot again,” Rabe said.

The measures Rabe uses to track meme movement aren’t entirely representative of some classic meme stock names like GameStop (GME) or AMC (AMC), which are actually both down more than 10% in the last month.

The top five holdings of Roundhill’s Meme ETF are Block (SQ), Coinbase (COIN), Enphase Energy (ENPH), DraftKings (DKNG), and Super Micro Computer (SMCI). DraftKings, Super Micro, and Coinbase have surged this year, with each rising 200% or more. With more than 15% of the fund invested in Nvidia (NVDA), the BOTZ ETF has ridden the coattails of a recent rally in the 2023 AI darling.

In the past five days alone, all five of those stocks are up no less than 8%, marking a clear shift in investor sentiment over the recent rally. Notably, Block and Coinbase also have significant exposure to Bitcoin (BTC-USD), which has surged over 20% during the last month and is hovering near 52-week highs.

As Rabe noted, investors had largely been selective this year “given a challenging macro environment due to tight monetary policy and geopolitical risks.” This led to a 2023 market rally largely led by the “Magnificent Seven” tech stocks while other areas of the market, like the Russell 2000, lagged far behind.

But a recent move to a more risk-on trade in markets has come as investors have interpreted a string of economic data showing cooling pricing pressures combined with a slowdown in the labor market to mean the Federal Reserve is done raising interest rates.

And that’s brought investors to go “bargain hunting,” buying up some of the past year’s laggards.