Nasdaq 100 forecast: Chipmakers lose momentum despite easing inflation

Risk appetite turned a bit sour on Thursday morning with European markets and US index futures joining the sell-off in Japan overnight. It looked like US indices were surrendering the previous session’s advance as renewed weakness across the semiconductor sector weighed on sentiment. Investors will turn their attention to Netflix, which is due to release its quarterly results after the closing bell. But on a macro level, it is the struggle in the chipmakers making for a cautious Nasdaq 100 forecast.

 

Chipmakers weigh on Nasdaq 100 forecast as AI enthusiasm begins to cool

 

The pressure was most evident across chipmakers. The VanEck Semiconductor ETF (SMH) dropped roughly 3%, with Arm Holdings among the biggest laggards after falling nearly 5%. Several European semiconductor names traded lower alongside their US counterparts. Yesterday, it was ASML that echoed the same sentiment with the stock trading sharply higher earlier in the session on the back of its earnings results but then reversed course and ended the day down.

 

So, it looks like the rally in artificial intelligence-related stocks appears to be losing some momentum after months of almost uninterrupted gains. Given the pace of the prior advance, some consolidation was always likely. But there are some investors who are increasingly questioning whether the enormous sums being committed to AI infrastructure can generate sufficient returns within a reasonable timeframe. That being said, rather than signalling the end of the AI trade, the recent weakness could simply reflect a period of portfolio rotation. After an exceptional run, some investors may prefer to lock in profits from richly valued semiconductor names and reallocate capital towards sectors offering more attractive valuations and steadier earnings visibility.

 

Softer inflation data vs. rising oil prices

 

One of the reasons why markets have been fairly resilient despite renews Middle East tensions and rising oil prices this week is to do with the fact that US inflationary pressures eased surprisingly sharply in June. Yesterday saw producer prices surprised on the downside after the previous day’s softer consumer inflation report, reinforcing hopes that price pressures are gradually moderating.

 

But whether this alone will be able to keep markets afloat remains to be seen. After all, markets are forward-looking and the recent upsurge in oil prices will not go unnoticed.

 

At the same time, another round of solid earnings from major US banks provided reassurance that corporate profitability remains healthy even as inflation slows. That said, the AI sector’s leadership is increasingly being challenged by profit-taking in some of its strongest performers.

 

Fed remains cautious despite improving data

 

Even with this week’s inflation data moving in the right direction, Federal Reserve officials continue to urge caution. Fed Chair Kevin Warsh, during his congressional testimony, alongside comments from Governor Chris Waller, stressed that policymakers need to see sustained evidence of disinflation before drawing firm conclusions. One or two encouraging inflation reports are unlikely to be enough, particularly as higher oil prices threaten to complicate the outlook in the months ahead.

 

For now, financial markets continue to anticipate just one further Fed rate increase this year. If expectations for policy tightening continue to edge higher, the US dollar could remain supported and thus may also provide modest pressure on equity markets.

 

Nasdaq 100 forecast: Technical analysis and levels to watch

 

Markets were moving into a more cautious, risk-off mood at the time of this writing, with the Nasdaq 100 turning lower after managing a decent bounce off the lows yesterday.

 

 

But once again, the index failed to break above this bearish trendline, and resistance near the key 30K mark, with the consolidation phase continuing.

 

So, will this turn into a full-blown risk-off move? It’s still too early to say. However, judging by recent price action, it probably pays to be a little more cautious.

 

We’ve had a very strong rally, followed by a healthy period of consolidation. But the fact that buying momentum is fading around the psychologically important 30,000 level suggests the market could be vulnerable to a deeper correction in the days ahead.

 

That said, I’m not ready to turn decisively bearish just yet. For that to happen, I’d want to see the index break below its triangle formation, followed by a move beneath the 29,000 level. That would provide much stronger confirmation that the bulls are losing control.

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R