The Israel-Hamas war, rising US Treasuries yield, high interest rates and weakening AI bubble could all be headwinds to consider.
The NASDAQ 100 index — comprising the 100 of the largest non-financial NASDAQ-listed stocks by market capitalization — has risen by circa 36% year-to-date. However, the index hit a 2023 peak of 15,841 points in mid-July and has now fallen by over 1,000 points to just 14,745.
To put this performance into context: 2022 saw the tech-heavy index lose 32.4% of its value compared to the S&P 500’s 18.1% fall and the FTSE 100’s slight rise. As earnings season continues amid rising geopolitical tensions, here are four interlinked factors to consider for the index’s future performance:
NASDAQ 100: four factors to watch
1. Israel-Hamas war
NASDAQ investors have good reason to worry that the war between Israel and Hamas could escalate into a regional war involving Saudi Arabia, Iran, and Lebanon.
Most recently, UN Secretary General Antonio Guterres — while calling the attacks by Hamas ‘appalling’ — has come under fire from Israel for saying that they did not happen ‘in a vacuum’ as there had been ’56 years of suffocating occupation.’
Meanwhile, fuel is close to running out in Gaza as Israel is preventing imports — though Israel also argues that Hamas is stockpiling hundreds of thousands of litres. Brent Crude remains elevated at circa $90 per barrel, reflecting fears that US sanctions on Iranian oil exports, or a closure of what the EIA calls the world’s most important oil chokepoint, the Strait of Hormuz, may occur.
As a general rule, higher oil prices can have a negative effect on NASDAQ tech stocks.
2. US Treasuries
10 year US Treasury yields are now at 5% and this completely risk-free return is causing some alarm. To start with, US inflation may not be cooling — while the CPI rate may be at 3.7%, this is above the 3% reading of June and nearly double the official 2% target. Meanwhile US federal debt (the deficit) now stands at a whopping $33 trillion, up by $1.6 billion since the political showdown to increase the debt ceiling earlier this year.
The US will need to sell more Treasuries to fund its current debt and finance even more at worse rates over the next few years.
These risks could be weighing heavily on the NASDAQ 100.
3. Interest rates
Tied into the Treasuries debate, the federal funds rate is currently at 5.25% to 5.50%. The markets are currently pricing in a ‘higher for longer’ scenario and also at least one more hike.
Of course, with inflation already proving to be stickier than expected, this may be an optimistic outlook — and any escalation in the Middle East that sends oil higher could see rates rise further than the market expects at present.
The pandemic era of ultraloose monetary policy saw NASDAQ 100 stocks hit record highs, but the headache of tightening policy was also responsible for the bear market of 2022. Further rate hikes could well send NASDAQ 100 shares lower.
4. The AI bubble
The so-called ‘magnificent seven’ are responsible for much of the NASDAQ’s gains in 2023 — Microsoft, Alphabet, Meta, Amazon, Apple and Nvidia. These companies are arguably riding a wave of AI euphoria caused by generative AI disruptors such as ChatGPT.
With the index becoming perhaps too one-sided, July saw a special rebalance where some of the weight assigned to the largest tech stocks was reassigned to smaller growth companies. Nvidia and Microsoft were most affected, each losing about three percentage points in terms of weighting.
There is now evidence that some of the AI positivity is falling. Yesterday, Alphabet reported that Q3 revenue rose by 11.6% year-over-year to $76.69 billion, above analyst predictions of $75.9 billion — yet shares in the behemoth have fallen by 9.3% since.
The company may be facing a landmark antitrust lawsuit from the US government amid a headcount reduction, but the bigger problem is potentially that the Cloud division only managed to generate $8.41 billion compared to expectations for $8.64 billion. For context, the division only started turning a profit in Q1 and has been running since 2008.
With more upsets perhaps to follow, the NASDAQ 100 may have further to fall through Q4.
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