Key Highlights

● BMO Capital initiated coverage of Vertiv at Outperform with a $329 price target, citing data-center demand.

● BMO also started coverage of nVent Electric at Outperform with a $212 target.

● The theme tied into Microchip's new 800V AI data-center design and a $4.2 billion DOE loan for Vistra's nuclear upgrades.

Vertiv was in the spotlight on Monday after BMO Capital Markets began covering the data-center equipment maker with an Outperform rating and a $329 price target, citing strong demand.

A bullish start from BMO

Vertiv (NYSE:VRT) was in focus on Monday, Oct. 5, after BMO Capital initiated coverage of the stock at Outperform with a $329 price target. The firm pointed to demand from data centers as the main reason for its positive view.

BMO also started coverage of nVent Electric (NYSE:NVT) at Outperform with a $212 target, according to the same round-up of Monday's top analyst calls. Both companies sell electrical and thermal equipment used in data centers and other industrial settings.

Picks and shovels for the AI boom

Vertiv makes the power and cooling systems that data centers need to run. As artificial-intelligence chips grow more powerful, they draw more electricity and give off more heat, which raises demand for the kind of gear Vertiv sells.

That places the company in the "picks and shovels" part of the AI trade: it does not make the chips themselves, but it benefits when companies build more facilities to house them.

The theme was visible across Monday's news. Microchip Technology (NASDAQ:MCHP) and Navitas Semiconductor (NASDAQ:NVTS) are collaborating on an 800V reference design for next-generation AI data centers. Flex (NASDAQ:FLEX) announced a $2.0 billion investment in Axiom, its cloud and power unit, led by General Catalyst with Koch Equity Development. And the Department of Energy made a conditional loan commitment of up to $4.2 billion to Vistra (NYSE:VST) to upgrade three nuclear plants, adding power capacity.

AI leaders push the Nasdaq to a record

AI stocks were at the heart of Monday's rally. Nvidia (NASDAQ:NVDA) closed at a record high, with a market value of about $5.76 trillion. The Associated Press called the chipmaker "the single strongest force lifting the S&P 500."

The Nasdaq Composite climbed 286.45 points to a record close of 27,477.31, and the Nasdaq-100 also set a record at 31,076.44. The S&P 500 rose 51.23 points to 7,773.95, just shy of its summer record, while the Dow Jones Industrial Average added 90.94 points to 51,267.90.

Taiwan Semiconductor's (NYSE:TSM) US-listed shares climbed toward record highs after Elon Musk confirmed early talks about TSMC joining his Terafab chip venture. "Just discussions, but something may come of it," Musk said. Foxconn reported a strong jump in third-quarter revenue on AI demand.

Strength despite rising rates

The gains came even as borrowing costs rose. The 10-year Treasury yield climbed to its highest close since 2002, as inflation worries persisted. The ISM services prices-paid index rose to its highest level since July 2022.

Daniela Hathorn of Capital.com explained why growth stocks were still rising: "growth stocks are rallying because Fed expectations have softened, while the risk-free rate against which those valuations are judged remains exceptionally high."

The softer Fed outlook followed Friday's jobs report, which showed only 29,000 jobs added in September. Traders now see roughly a one-in-four or smaller chance of an October Federal Reserve rate hike, down from better than even a week ago.

Utilities, which supply power to data centers, also gained on Monday, with the sector among the better performers at midday.

What to watch

Vertiv's next quarterly report will be the key test of whether data-center orders live up to BMO's expectations. Microchip and Navitas plan to show their 800V design at a Microchip event on Oct. 12-15. On the macro side, the Federal Reserve releases minutes from its September meeting on Wednesday, Oct. 7, at 2pm ET, and the Fed meets again on Oct. 27-28. Third-quarter earnings season starts with big banks on Oct. 13.