Nasdaq 7% AI-Driven June Rally at Risk

US indices have had a strong June so far, with the Nasdaq 7% higher and leading record highs as it is the biggest beneficiary of the ongoing AI rally.

Continued Gains, But Challenges Ahead

On Tuesday, Nvidia became the world's most valuable company by surpassing Apple and Microsoft in market capitalisation. This helped boost tech stocks as well as the broader Nasdaq index. The rise came after Apple's WWDC conference highlighted AI achievements. However, some are concerned about the impact of interest rates as retail sales came in lower than expected, suggesting consumer demand may weaken if rates do not fall soon.

The result is that gains have become more narrowly focused on artificial intelligence-related stocks like Qualcomm and Super Micro Computer. This increases the risk of a correction as the rise relies on continued strong demand for a relatively small number of stocks trading at valuations well above their historical averages. For example, Nvidia now has a price-to-earnings ratio of over 70 times, above its long-term average of around 40 times.

Fed Policy Impact Unclear

One of the market's concerns is understanding the seemingly conflicting signals from recent economic data and the FMOC meeting. While inflation fell, suggesting interest rates could drop, the FOMC's projections showed only one rate cut this year, down from three previously projected. A Fed that is less likely to lower rates could make it harder for the market to continue growing, as higher valuations typically rely on relatively low interest rates to encourage investment with leverage.

For the Nasdaq specifically, the impact of Fed policy may not be the primary issue as investors increase holdings in artificial intelligence companies. General concerns about higher interest rates are limiting growth in most sectors. If key players such as Nvidia continue growing earnings at a similar rate to their stock price increases, Nasdaq may continue rising even if the Fed does not lower rates as much as the market hopes.

Nasdaq Upside Limited

The Nasdaq has continued higher to reach the 20000 psychological level, which coincides with the upper boundary of the ascending channel established at 14000. It also corresponds with the measured-move projection seen in the correction from 18470 to 17000, suggesting there may be a pullback at least to around 19000. Should the upward movement persist, the next expected resistance below the 21000 and 20500 round resistances would be at 20180, the 100% extension of the 17000-18970 move.

Source: SpreadEx / USTECH 100

Key Takeaways

The US stock market saw strong gains in June, with the Nasdaq up 7% and reaching record highs due to continued growth in AI. However, some concerns remain around inflation, interest rates, and whether demand from consumers and broader sectors can continue supporting high valuations. The impact of future Fed policy changes also brings uncertainty, as a less dovish stance could challenge further market expansion amid already elevated price-to-earnings ratios across tech.