NASDAQ 100 OUTLOOK:
- Inflation concerns weigh on tech stocks and trigger a large sell-off on Wall Street
- The Nasdaq 100 plunges more than 2.5%
- Airlines, on the other hand, rally on expectations the coming quarters will be good for the travel industry
U.S. stocks took a dive on Thursday, dragged down by a sharp pullback in tech names amid concerns about the direction of monetary policy in the face of soaring consumer prices. At the market close, the S&P 500 plunged 1.42% to 4,659, while the Dow Jones retreated 0.48% to 36,115. The Nasdaq 100, meanwhile, led the sell-off on Wall Street, plummeting 2.57% to 15,495, weighed by heavy losses in the shares of Microsoft (MSFT: -4.24%), Tesla (TSLA: -6.68%), Nvidia (NVDA: -5.14%), and Amazon (AMZN: -2.42%), to name a few.
Inflation seemed to be the likely culprit for the negative mood and risk aversion. Yesterday, December CPI came in at 7% y/y, the highest level in nearly four decades. Today, PPI for the same period clocked in at a whopping 9.7% y/y, the second-highest reading since 2010, although it slowed modestly from the previous month.
Persistent and widespread inflation will likely lead the Fed to raise borrowing costs multiple times in 2022 and possibly begin reducing the size of its balance sheet sometime in the latter part of the year. For now, three hikes are fully discounted, but a fourth is slowly creeping into expectations.
The steep tightening cycle contemplated by policymakers should fuel volatility over the short and medium-term, creating a challenging backdrop for stocks, particularly those in the tech and growth space that rely on low rates to justify their elevated valuations. The current dynamics should also accelerate the rotation from speculative corners of the market to value-oriented names, producing new winners and losers in the first quarter.
In any case, it wasn’t all negative on Thursday. For example, part of the reopening trade rallied strongly, with airlines and cruise operators rising across the board. Wall Street became a tad more bullish on the leisure and travel sector after Delta Airlines (DAL: +2.12%) released its quarterly numbers. The commercial carrier beat top and bottom-line estimates and signaled that the Omicron surge hasn’t derailed the forecast for a meaningful profit in 2022, though losses are still expected for January and February. While the pandemic may weigh down travel in the very short term, its long-term outlook is increasingly rosy, as the eventual end of the health crisis will unleash pent-up demand.
Moving on to other catalysts, the fourth-quarter earnings season officially kicks off on Friday with reports from Wall Street’s big banks. Highlights of the session will be results from JPMorgan (JPM), Wells Fargo (WFC), and Citigroup (C), with all three announcing before the opening bell. While recent execution and performance will be important, traders should pay closer attention to forward guidance for clues on the outlook for lending and net interest margins as the Fed prepares to raise rates. If banks sound bullish on those two metrics and show confidence in the economic recovery, financials could shine and command strength over the short and medium-term. This may imply more upside potential for ETFs in the sector such as XLF.
NASDAQ 100 4-HOUR CHART
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— Written by Diego Colman, Contributor