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

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

Margaret Yang, CFA, Strategist

NASDAQ 100 FUNDAMENTALFORECAST: BULLISH

  • Tech rebound sent the S&P 500 and Dow Jones to record highs last week
  • Upbeat data, vaccine progress and fresh stimulus may underpin the fundamental outlook
  • The Nasdaq 100 index is trading at a 38.14 price-to-earnings (P/E) ratio, far above its 5-year average
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The Nasdaq 100 index rebounded strongly towards the end of last week as calming Treasury yields restored market confidence alongside the passing of the US$ 1.9 trillion federal spending bill. Lower-than-expected US core CPI data and smooth Treasury note auctions led longer-term yields to stabilize, alleviating pressure on risk assets, and in particular the technology sector.

The US 10-year treasury yield was little changed 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 as compared to government bonds, as the latter appear to be offering better returns considering a risk-adjusted basis. Technology stocks offer relatively lower dividend yields compared to value stocks, rendering them even more susceptible to a selloff when yields climb.

Since mid-February, stimulus-backed reflation hopes led to a catch-up rally in value stocks as investors rotated out from the white-hot tech sector. Value stocks have largely unperformed the growth sector since the beginning of the Covid-19 pandemic (chart below), as lockdowns and social distancing measures reshaped consumers’ behaviour in favour of digital services. The MSCI world growth index surged over 66% over the past 12 months, whereas the MSCI World value index climbed 48%. This trend could carry on if traditional industries - energy, industrial, financial, consumer discretionary and materials – benefit more from an impending economic reopening.

MSCI World Growth Index vs. Value Index – 12 Months (Normalized)

Growth vs. Value

Source: Bloomberg, DailyFX

The recent pullback in the technology sector may prove to be another healthy correction amid a medium-term bull trend, as an improved fundamental outlook and fresh stimulus are likely to underpin corporate earnings in the quarters to come. The latest nonfarm payrolls, US retail sales, consumer confidence, durable goods order and jobless claims figures have all beaten market expectations, a sign that the economy is rebounding at a faster-than-expected pace.

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

Next week’s FOMC meeting and the follow-on press conference by Fed Chair Jerome Powell will be closely eyed by investors, who are looking for clues about the Fed tapering plan and the central bank’s view on rising longer-term yields. Previously, Powell reiterated his dovish stance but failed to address rising inflation concerns, which led to a further yield surge and stock market decline. If the Fed decides to twist the bond-purchasing program by implementing some sort of yield curve control (YCC), equity markets may find more upside potential.

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Valuation-wise, the Nasdaq 100 index is trading at a 38.14 price-to-earnings (P/E) ratio, which has come off the recent peak of 40.43 seen in mid-February, but it is still more than 40% above its five-year average of 26.48. Rich valuation may render the index vulnerable to profit-taking should rising yields continue to exert downward pressure over risk assets.

Nasdaq 100 Index vs. P/E Ratio – 5 Years

Nasdaq 100 vs. P/E Ratio

Source: Bloomberg, DailyFX

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--- Written by Margaret Yang, Strategist for DailyFX.com

To contact Margaret, use the Comments section below or @margaretyjy on Twitter

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