Solid AI Results Boost Nasdaq to New Records

Despite the situation in the Middle East and a more hawkish Fed, US tech stocks are leading the Nasdaq to new records, with rotation into tech returning amid renewed confidence that AI will lead the way.

Factors Moving the Market

• US tech stocks are leading the way higher amid solid earnings and continued demand for chips and memory.
• Solid US economic data suggests the economy might have turned a corner and is accelerating despite the war.
• Higher inflation leaves the Fed on hold while raising the odds of a hike.
• Markets remain vulnerable to a shock if the war in the Middle East goes hot again, but analysts are bullish after most companies have reported earnings.

Solid Tech Earnings Boost Nasdaq to Record

The premier US tech index is back to record highs after a bit of profit-taking and market jitters over the weekend amid the situation in Iran, building on last week's success. Last Wednesday was the Champions League final of tech stocks, as most of the Magnificent 7 reported earnings right after the Fed's rate decision. Although there were some differences in the outcomes (Google rocketed higher, Meta fell back), the overall consensus was that growth is solid. Particularly, capital expenditures remain robust, with traders hoping they will fuel growth in the AI-baked sector for months, if not years, to come. While demand for AI remains solid, investors are also still worried about the disruption it will have in the software space. Palantir's earnings on Tuesday were the latest to be hit by investor unease. Despite posting an 85% revenue increase over the last year, the company failed to impress investors. 

The gains in the Nasdaq also come despite the market solidifying its hawkish view of the Fed. Before last week's meeting, the market was pricing in about a 20% chance of a cut by the end of the year. Now that has shifted to a more than 30% chance of a hike. The market dynamics have shifted, as proven by the performance of the main indices last month. April saw the largest monthly gain for the Nasdaq since April of 2020 and, for the S&P 500, the largest percentage gain since November of the same year. The underperformance of the industrial-heavy DJIA is notable, as higher energy prices are likely to impact manufacturers and other businesses with smaller margins. The earlier theme of rotating out of tech stocks might be reversing as higher crude prices from the war prompt traders to renew bets on AI.

Momentum Is On the Bullish Side

The US economy is expected to have accelerated to 2.0% in the first quarter, despite the uncertainty caused by the war. Meanwhile, initial jobless claims fell to their lowest level since 1969, suggesting the jobs market may have hit a bottom and that March's strong hiring numbers were not an outlier. A recovering economy could boost equities even if the Fed is unable to cut rates as profits rise and whet risk appetite. While analysts are bullish on tech in general, the underperformance of Meta and Microsoft last week suggests investors still have concerns, particularly about large spending and the risks to software companies. And the market stumble on Monday suggests remaining vulnerability if the war in the Middle East suddenly heats up.

Nasdaq at Risk of VWAP Rejection at Record Highs

The spike in the Nasdaq on Tuesday has brought the tech index to VWAP resistance, with the upper band starting to look down suggesting decreasing volume, particularly as the RSI remains in overbought territory. If resistance holds firm, the Tech 100 index could start to roll over, potentially pulling back towards the mid VWAP under 27K. However, if the rally extends further, the next logical resistance levels to watch are the round 28250 and 28500 levels, given that the Nasdaq is in price discovery mode.

Source: SpreadEx | US Tech 100 Daily