Tech stocks have been on a roll ever since bottoming out after the Iran conflict on March 30, helping push the broader market into uncharted territory. With the geopolitical tensions in the Middle East turning increasingly murkier, does the sector still have enough momentum to sustain its rally.
Ahead of Monday, the Nasdaq 100 Index, comprising 100 of the biggest non-financial tech stocks, was on a 13-day winning streak, riding on the hopes of a peace deal between the U.S. and Iran and the reopening of the Strait of Hormuz to shipping traffic.
The streak appears on track to be broken as hopes of a de-escalation dimmed after the U.S. Navy seized an Iranian cargo ship in the Gulf of Oman, near the Strait of Hormuz, over the weekend. Iran, in turn, has announced a blockade of the strait, while also sending mixed messages regarding its intention about attending another round of peace talks in Islamabad.
By mid-session the index was down half a percentage point.
Tech Rally Resumes: The Nasdaq 100 Index hit records in four consecutive sessions last week as the tech sector recovered from the Iran conflict-induced weakness seen in March.
Before the war, the index peaked at 26,165.08 on Jan. 28, and then went about a consolidation move through February. With the conflict beginning on Feb. 28, the Middle East geopolitical tensions dragged the index to a low of 22,841.42 on March 30, a peak-trough drop of 12.7%.
Nasdaq 100 Vs Tech & Communication Services Industries
Source: Yahoo Finance
^SP500-4530: Semi & Semi Equipment
^SP500-50: Communication Services
^SP500-4520: Technology, Hardware & Equipment
^SP500-4510: Software & Services
The recovery seen since March 30 has been led by semiconductor & semiconductor equipment followed by communications services stocks. The Magnificent Seven stocks, a group of seven mega-cap tech stocks, led the tech downturn during March, and the same stocks have led from the front in the current recovery.
Magnificent 7 Vs QQQ (March Performance)
Source: TradingView
Magnificent 7 Vs QQQ (Performance Since March 30 Bottom)
The renewed rally has stretched the already lofty valuation multiples of the Mag 7 and other large-cap tech stocks.
Magnificent 7 Vs. S&P 500: Forward P/E Multiples
Source: Yardeni
Any disruptions to earnings expectations could pressure multiples.
The durability and the sustainability of the rally depends on how soon the Iran conflict nears a resolution. Traders are still holding onto their faint hopes that the warring sides will begin to re-engage, given the diplomatic channels are not yet closed.
Earnings Catalyst Await: Also, the rally seen since the end of March goes on to prove that investors are willing to look past the Iran conflict and toward earnings. Danish investment bank Saxo’s Investment and Options Strategist Koen Hoorelbeke said the artificial intelligence (AI) and large-cap tech earnings narrative has been running on its own momentum, partly explaining the market’s resilience. As long as the earnings picture holds, the rally might continue, the strategist said.
Therefore, the next two weeks are going to be key for the market. The Mag 7 earnings kick off with Tesla’s earnings report on Wednesday. The rest, except Nvidia, report the following week: Amazon, Alphabet, Microsoft and Meta Platforms on Wednesday, April 28, and Apple on Thursday, April 29. Companies accounting for over 45% of the total S&P 500 market capitalization are due to report in the week of April 29.
Source: Morgan Stanley
Morgan Stanley’s Equity Strategist Michael Wilson expects earnings recovery to remain intact despite geopolitical risks, driven by the return of positive leverage. Pointing to signals of firm earnings recovery, the strategist said the trailing S&P 500 earnings per share (EPS) growth was accelerating to more than 15% and forward EPS growth was accelerating to 22%.
Since the Iran war started, S&P 500 earnings revisions breadth has been stable within the 5%-10% range, Wilson also noted that early first-quarter results are strong, with an EPS upside surprise of 8.2% and sales surprise of 2% for S&P 500 companies.
Following the earnings announcements, the market will also have to contend with the April Federal Open Market Committee (FOMC) meeting, which has been scheduled for April 28-29. A hawkish tone could upset the market’s rhythm.
