Nasdaq Retreats as Fed Knocks Hopes of Rate Cuts

The Federal Open Market Committee voted unanimously on Wednesday to leave the benchmark interest rate unchanged as widely expected in a target range between 5.25% and 5.5% for a fourth straight month.

Federal Reserve Chair Jerome Powell tempered expectations that the central bank could start cutting interest rates in March, as he seeks further evidence that inflation in the U.S. is continuing to slow towards the 2% target amid robust economic growth and resilient labour market.

In a further sign that the Federal Reserve is not likely to cut interest rates in March, Jerome Powell said that it was not likely the committee will reach a level of confidence by March to cut rates, though continued to stress that future policy decisions would depend on incoming data.

According to the CME FedWatch Tool, the odds of a March rate cut dropped to 30% from 65% prior to the statement. Also, Jerome Powell pushed back against market expectations for five to six interest rate cuts and reinforced that the committee projects 75 basis points of cuts in 2024.

The Fed decided to hold borrowing costs at 23-year highs after its latest policy meeting but changed its tone for the first time and flagged that is no longer considering additional interest rate hikes. The change of Language was perceived to mean that the central bank had finally called the end of the most aggressive tightening cycle.

Source: TradingView

The tech heavy index, which is the most sensitive to interest rates, declined after the Fed meeting as sentiment was dented by the diminishing expectations for a March interest rate cut. Nonetheless, we are of the view that such weakness would be temporary, and we see good prospects of the index trading higher in the year ahead.

The index is up 5% YTD and a whopping 23% since its October 2023 low. This surge has been driven by the biggest tech companies or “Magnificent Seven” with the exception of Tesla, which has been trending down since July 2023 and is the only laggard.

Six of the seven companies comprising the “Magnificent Seven” such as NVIDIA, Amazon, Meta Platforms, Alphabet, Microsoft, and Apple, have reported robust Q4 earnings and are likely to continue to be the positive contributors for the tech index in 2024.

Following the breath taking run by the artificial intelligence (AI)-related stocks over the past year, some cooling-off in the short-term could not be ruled out. Nonetheless, that does not dent the long-term prospects for AI, and we believe the tech darlings would continue to fare well in the years ahead.

Active traders looking for magnified exposure to the technology index may consider Leverage Shares +5x Long US Tech 100 or -3x Short US tech 100 ETPs.

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