Amidst the 2023 stock market rally, meme stocks have emerged as unexpected winners. While the S&P 500 has seen a 10% surge, some meme stocks have witnessed even greater gains, outperforming the benchmark. The Roundhill Meme ETF (MEME) and Robotics and AI ETF (BOTZ) have risen by 15.2% and 17.4% respectively since the recent low on October 27.

This surge in meme stocks is a significant departure from the performance of growth-stage tech companies, which have mainly relied on AI-driven advancements. The Federal Reserve’s decision to keep interest rates low has played a crucial role in boosting the profitability of meme stocks. Companies categorized as “meme stocks” are often unprofitable and rely heavily on raising capital at reasonable prices. Lower interest rates provide them with an opportunity to secure funding more efficiently.

DataTrek co-founder, Jesica Rabe, sees the resurgence of meme stocks as an indication of investors’ growing optimism. She believes it demonstrates that “investors’ animal spirits are starting to run hot again.” However, it is worth noting that classic meme stock names like GameStop and AMC have experienced declines of over 10% in the past month, suggesting that not all meme stocks are benefiting equally from this trend.

The top holdings of Roundhill’s meme ETF consist of Block, Coinbase, Enphase Energy, DraftKings, and Super Micro Computer. Notably, DraftKings, SuperMicro, and Coinbase have witnessed significant surges, with all three companies experiencing over a 200% increase in value this year. Furthermore, the BOTZ ETF has gained momentum due to the recent rally in the AI sector, with over 15% of the fund invested in Nvidia.

Recent market sentiment has shifted toward a more risk-on trade, leading investors to seek out undervalued stocks. Bargain hunting has become a prevalent strategy as investors interpret economic data showing cooling pricing pressures and a slowdown in the labor market as indicators that the Federal Reserve is unlikely to raise interest rates further.

As the market rally continues, it will be interesting to see how meme stocks fare in the long term. While their performance has been impressive in recent weeks, it is crucial for investors to exercise caution and conduct thorough research before jumping into this volatile market segment.