• AI boom propels Nasdaq 100 to record highs.
• Nvidia earnings results are a key test to the tech stocks rally.
• Fed minutes in focus for clues about rate cuts.

Artificial intelligence (AI) boom was a key driver of the latest Nasdaq 100 rally, as the hype over AI saw massive inflows into the sector. However, the strong up trend is facing a major test as fourth-quarter earnings from NVIDIA Corporation and the Federal Reserve minutes are due this week.

AI Boom and Nasdaq 100’s meteoric rise

The Nasdaq 100 index has risen more than 67% from its October 2022 low driven by AI optimism. The AI darling NVIDIA has been the star performer since the onset of 2023, dragging along other technology AI related companies from the semiconductor sector, as expectations the rising tide could lift the broader sector has risen enormously.

NVIDIA earnings: a critical test for the tech rally

The highlight of this week is the earnings release from NVIDIA, which reports on Wednesday after the bell. Apart from Q4 earnings focus would be on NVIDIA’s forward guidance as investors’ expectations are sky high.

The company which produces high-end graphic processor units (GPUs) that power artificial intelligence technology, rose 258% in 2023 and is up 50% YTD. The enthusiasm over AI has helped NVIDIA’s valuation soar and become the third largest U.S. company by market capitalisation, recently dethroning Alphabet.

Fed minutes and the challenge of higher rates

The economic calendar is quiet this week and Wednesday’s minutes from the Federal Reserve’s January meeting would be the highlight, which could provide a fresh insight in regard to borrowing costs this year.

The Fed kept borrowing costs unchanged at their January meeting and indicated that a rate cut at the March meeting is unlikely. Fed Chair Jerome Powell stressed that more evidence that inflation is on a sustainable path to the central bank’s target of 2% is needed, before considering rate cuts.

The stronger-than-expected U.S. consumer price index and producer price index last week, amid resilient labour market and GDP, left investors worried that inflation could persist and scaled back expectations for interest rate cuts this year. The pickup in inflation in January triggered a spike in treasury yields, which can act as a head wind to the interest rate sensitive technology sector.

Global economic uncertainty vs. Nasdaq 100 gains

Despite an uncertain global economic outlook at the beginning of last year, the Nasdaq 100 index has gained 65% from the start of 2023 to its recent February high; however, gains were concentrated among the Magnificent Seven except Tesla, driven by AI boom in demand and rate cut expectations.

Source: TradingView

Opportunities beyond the Magnificent Seven

We are seeing signs that opportunities in stocks could broaden out beyond the 7 mega caps, which suggests that the rally could extend further, especially in the second half of the year. this year for two reasons, the first of which is the resilience of the U.S. economy.

If the U.S. economy continues to be robust and earnings remain resilient, stocks beyond the Magnificent Seven are likely to start to participate in the rally. In the short-term, however, we are of the view that the rally is at inflection point and a deeper pull back could be seen. Such short-term weakness would present a good buying opportunity for investors, and we see levels towards 18,500 as achievable over the long-term.