Nasdaq 100 Forecast: Will Calming Yields Revive the Tech Sector?

Nasdaq 100 Forecast: Will Calming Yields Revive the Tech Sector?

NASDAQ 100 FUNDAMENTALFORECAST: BULLISH
Tech rally sent the S&P 500 and Dow Jones to record highs last week
Upbeat data, vaccine advancement and fresh stimulation may underpin the basic prognosis
The Nasdaq 100 index is trading at a 38.14 price-to-earnings (P/E) ratio, much over its 5-year average


The Nasdaq 100 index rebounded strongly towards the end of last week as calming Treasury yields restored market confidence alongside the passing of this US$ 1.9 trillion federal spending bill. Lower-than-expected US core CPI smooth and data Treasury note auctions directed longer-term returns to stabilize, relieving pressure on risk assets, and in particular the technology industry.

The US 10-year treasury return was little altered from a week ago, after surging more than 70% from a January low of 0.905% to a recent high of 1.622%. Higher longer-term yields make stocks less appealing in comparison with government bonds, since the latter appear to be providing better returns contemplating a risk-adjusted basis. Tech stocks offer comparatively lower volatility yields compared to value stocks, making them more vulnerable to a selloff when yields rise.

Since mid-February, stimulus-backed reflation expects led to some catch-up rally in stocks as investors swapped out from the white-hot tech industry. Value stocks have largely unperformed the development sector since the beginning of the Covid-19 pandemic (chart below), as lockdowns and social distancing measures staged customers' behavior in favour of electronic services. The MSCI world growth index surged over 66% over the previous 12 months, whereas the MSCI World value index climbed 48%. This trend could continue if conventional businesses - energy, industrial, financial, consumer discretionary and materials -- gain from an impending economic meltdown.

The recent pullback in the tech sector may prove to be another wholesome correction involving a medium-term bull trend, as a better basic outlook and fresh stimulus are very likely to underpin corporate earnings in the quarters to come.

Vaccine rollouts helped to bring down daily Covid-19 infections in the past few weeks, with 7-day average counts falling into 63k on March 10th by a January peak of 259k. The US have experienced over 95 million people, or more than a quarter of the population, vaccinated within the previous two months. Quick vaccine rollouts may pave way for quicker reopening and support a strong recovery in consumer spending.

Next week's FOMC meeting along with also the follow-on press conference with Fed Chair Jerome Powell will be closely eyed by shareholders, who are searching for clues about the Fed tapering plan along with the central bank's perspective on increasing longer-term returns. Previously, Powell reiterated his dovish position but neglected to address rising inflation issues, which led to a further return surge and stock market decline. If the Fed decides to twist the bond-purchasing program by implementing some type of return curve controller (YCC), equity markets might discover more upside potential.

Valuation-wise, the Nasdaq 100 index is currently trading in a 38.14 price-to-earnings (P/E) ratio, which has come off the current peak of 40.43 found in mid-February, but it's nonetheless more than 40% above its five-year typical of 26.48. Rich evaluation may leave the index vulnerable to profit-taking should climbing yields continue to apply downward pressure over danger assets.

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