US tech stocks have been on a seemingly unrelenting uptrend for much of this year.
The NQ100_m, which tracks the Nasdaq 100 index, is edging higher even after the Nasdaq 100’s gain of 1.2% yesterday (Wednesday, May 17th) fuelled by optimism that the US can avert a first-ever default.
So far this year, the Nasdaq 100 index, which comprises 100 of the largest US non-financial stocks listed on the Nasdaq exchange, has already climbed by 24.2%.
The Nasdaq 100’s year-to-date tall of 24.2% is about triple the S&P 500’s year-to-date gains of 8.3%, while also far outperforming the 7.7% advance for global stocks so far this year (as measured by the MSCI ACWI index).
13,730.1: August 16th, 2022 intraday high
13604.2: 50% Fibonacci retracement from this index’s November 2021 – October 2022 declines.
If both of the above price levels can be conquered, that would bring the NQ100_m to its highest levels since April 2022!
Here are 4 reasons:
1) Markets predict Fed will CUT interest rates later in 2023
US tech companies may soon get to enjoy cheaper borrowing costs (less money needed to service loans which are used to grow the business), as markets predict that the Fed rate hikes may soon be over.
Indeed, markets are now forecasting that the Fed would instead CUT interest rates by 75 basis points between September 2023 until January 2024.
Hence, markets have flocked back to tech stocks in anticipation of those Fed rate cuts/cheaper borrowing costs, and drove the Nasdaq 100 higher.
The buzz surrounding artificial intelligence has been feverish across markets since OpenAI released ChatGPT at the end of November 2022.
This seismic AI development has the potential to change our world as we know it, prompting tech titans including Microsoft and Alphabet (Google’s parent company) to make hefty investments so as to gain an AI edge.
That AI fervour has also prompted investors to try and get ahead of this AI wave, to the extent of doubling the respective share prices of Nvidia and Meta Platforms (Facebook’s parent company) so far this year (each has a 100+% year-to-date gain).
These two stocks are also the top-2 performers on both the S&P 500 and the Nasdaq 100 so far this year.
3) Big Tech = safe havens?
Markets are bracing for a potential US recession in the second half of 2023. And when the economy contracts, investors and traders are on the lookout for companies that can best preserve their earnings.
Looking back at the short-lived but steep recession during the Covid-19 pandemic, note how the Nasdaq 100 outperformed global stocks. These Big Tech companies were able to preserve their earning powers (more consumption of online/digital services e.g. more online shopping and more time browsing social media) as the world entered a lockdown.
Markets hope the same can be replicated in the event of the next recession.
Furthermore, these tech giants are undergoing some major cost-cutting measures at present, including laying off many thousands of its workers.
Such cost-saving moves should put these tech companies’ balance sheets on a firmer footing to better weather any upcoming economic recession.
4) Nasdaq 100’s historical resilience
The Nasdaq 100 has never posted back-to-back annual declines since the dot com bubble.
Here’s a quick recap of the Nasdaq 100’s annual declines over the past 20 years:
2022: fell 32.97%
(due to the Federal Reserve’s aggressive rate hikes last year (425 basis points in 2022 alone) so as to subdue inflation that had reached its fastest levels since the 1980s!)
Since its inception in 1985, the Nasdaq 100 has only posted consecutive annual drops during the dot-com bubble at the start of this millennium:
Investors are hoping that such a track record will be upheld in 2023, whereby the Nasdaq 100 will avoid another annual loss, having already fallen sharply last year.
Ultimately, there are bound to be more twists and turns for stock markets for the rest of 2023:
However, provided the ongoing market optimism stemming from the four factors listed above has got more room to run, the Nasdaq 100 appears to have enough fundamental reasons to reach a one-year high over the near term.
Stock markets are finding some relief after the US debt limit deal was approved by the House, with the Senate’s vote now set to be a formality.
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After tracking sideways for the whole of this month, we could say the tech-heavy index was always going to see some volatility around earnings season when the big hitters started announcing their results. But as an entrée, the small matter of the March banking crisis reared its head again in the shape of First Republic bank who revealed that depositors fled in huge numbers ($100 billion to be more precise) during the banking stress.
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