Nasdaq plunged on the concern of tech restrictions on China

·         At TTM EPS around $191 and recent high 5700, S&P-500 TTM PE is now almost around 30; at extreme bubble zone on hopes & hypes of Trump & Fed stimulus

Wall Street was trading mixed for the last few days amid mixed US economic data, mixed Fed talks, and mixed sectoral movement as techs plunged the renewed concern of US tech restrictions on China. As per reports (ahead of the Nov’24 US election, and due to domestic political compulsions), the Biden admin may impose severe trade restrictions if US MNCs/ tech companies continue giving China access to advanced AI semiconductor technology.

On early Tuesday, stocks of American semiconductor companies dropped following a report suggesting that the US might impose stricter trade restrictions to limit China's access to AI chip technology; specifically, the White House could invoke the Foreign Direct Product Rule (FDPR), potentially restricting companies like Tokyo Electron and ASML Holding NV from supplying Chinese semiconductor firms due to their incorporation of American hi-tech. Subsequently, AI chip giants registered significant losses led by Nvidia, Micron, Broadcom, Qualcomm, AMD, and Intel; mega caps were all in the red in premarket trading led by Microsoft, Apple, Amazon, Meta, and Alphabet.

There was also a report that Google and Microsoft helped Chinese firms skirt the ban on Nvidia chips. There was another unconfirmed report that Chinese President Xi suffered a stroke during a China's Communist Party (CCP) meeting, which may create leadership/political & policy uncertainty in the 2nd largest economy of the world and the largest trading partner of the US, the EU, and also India.

On Monday Wall Street Futures soared on hopes & hypes of a dual stimulus boost from early 2025 led by the Fed’s likely rate cuts (eleven) cycle from Dec’24 or even Sep’24 and continuation of Trump’s tax cut policy along with any additional corporate tax cut (from present 21% to 15%). Gold also jumped to a fresh lifetime high of almost 2482 early Tuesday as all these tax cuts may add to the US fiscal deficit & public debt, resulting in more devaluation of LCU (USD) and inflation. Also escalated geopolitical tensions over the Gaza war (Israel-Hezbollah/Iran) have boosted Gold despite some progress on a permanent ceasefire.

In Brief, Trump may be positive for USD/US bond yields and mixed for Equities (higher borrowing costs, China/EU trade tantrum, nationalistic trade policies, and tax cuts), and also positive for Cryptos to some extent; but overall, there may be limited ability for a monumental change in policies by Trump and even Biden due to various checks & balances in the US political & policy system. Trump may not get a trifecta this time unlike his first two years (2016-18). Trump’s policies are seen as inflationary due to attempted tax cuts, tighter immigration, and higher import tariffs (import taxes), but tax cuts and deregulation (if any) are positive.

Overall, tax revenue decreased under Trump (after TJCA-2017), but in the longer term, US tax revenue to normal GDP ratio is around 17%, while the public debt interest/tax revenue ratio increased from around 7% pre-COVID to almost 15% in FY23 (post-COVID) and poised to scale 20% by FY25 due to increasing borrowing and interest rate/bond yield/coupon rate amid elevated inflation. This is a red flag as China and EU’s ratio is around 5.5-6.5%. All these mean that the US is on an unsustainable path of higher fiscal deficit, higher debt (growing more than normal GFP), higher currency devaluation, higher interest/borrowing cost and higher inflation. Thus despite USD being the global reserve currency of the world and preferred trade currency, always in demand is getting a boost as a haven/inflation hedge physical/digital asset. Moreover, EM central banks like India/RBI, China/PBOC etc are actively buying Gold as a part of their strategy to diversify from USD to avoid being trapped in a US/EU sanction for any geopolitical issue (like the Russia-Ukraine war).

Fair Valuation: SPX-500 (S&P 500)

S&P 500 reported an actual EPS of 47.79 in Q4CY23 and 192.43 for CY23 against 172.75 in CY22; i.e. yearly growth of around +11.39% against long-term average growth rate around +11.40% against average nominal GDP growth +6.0%. Meanwhile, the Q1CY24 EPS of S&P 500 was around 47.37 vs 47.79 sequentially (-0.88%) and 48.41 yearly (-2.15%); overall subdued amid higher borrowing costs, higher cost of living, lower discretionary consumer spending, and lingering geopolitical tensions.

At an average CAGR of around +12% for CY: 24-26, the estimated EPS would be around 215.52, 241.38, and 270.35. Assuming a fair PE of 20, the estimated fair value of SPX-500 would be around 4310 for CY24, 4828 for CY25, and 5407 for CY26. As the financial market usually discounts at least 12 months of EPS in advance, the fair value of SPX-500 should be around 4828 by CY24 and 5407 by CY25 against a recent lifetime high of around 5700 (TTM EPS almost at 30).

The SPX-500 has already scaled around 5700 new lifetime high a few days ago on hopes & hypes of dual stimulus-Fed’s monetary stimulus (11 QTR rate cuts cycle) and Trump’s fiscal stimulus (tax cuts and infra spending) coupled with AI chip optimism (for the last few months). The market is now running much ahead of fundamentals.

Looking ahead, the S&P 500 should hover around 4800-5800 for CY24 against the present price of around 5640; if there is any unusual bearish event/development, then the S&P 500 may further fall to around 4600-4300 and even 4000 levels (whatever may be the excuses). Overall, the present PE ratio of DJ-30 (Dow Jones Industrial Average) is now around 28 against a mean/fair PE of 20, while Nasdaq-100 (NQ-100) has a present PE of around 33 against a median/fair PE of 22.

Stimulus-addicted Wall Street is now clearly running much ahead of its fundamentals on hopes & hypes for both monetary and fiscal stimulus coupled with Trumponomics optimism (tax cuts, deregulation and infra stimulus); the market is almost discounted of 11-Fed rate cuts cycle and Trumponomics till almost 2027, assuming EPS around $303 from present $193 in CY23. But the US political system and Congressional debt limit may not permit Trumponomics in full swing as being assumed.

Weekly-Technical trading levels: DJ-30, NQ-100, SPX-500 and Gold

Whatever the narrative, technically Dow Future (40500) has to sustain over 40700 for any further rally to 41000/41300-41500/41800 and 41950/42000*-42700 in the coming days; otherwise sustaining below 40650, DJ-30 may again fall to 40400/40200-40000/39900 and further 39800/39600-39400/39200 and 39000/38800-38600/38300 in the coming days.

Similarly, NQ-100 Future (20600) has to sustain over 21050 for a further rally to 21300/21700-21900/22050 and even 23000 levels in the coming days; otherwise, sustaining below 21000/20900-20700/20300 may again fall to 20000/19850-19750/19650* and 19450/19100-18800/18500 and 18400/18100-18000/17700 and 17600/17500-17300/17150 in the coming days.

Technically, SPX-500 (5680), now has to sustain over 5750 for any further rally to 5850/5800-6000/6050 and 6100/6150 in the coming days; otherwise, sustaining below 5700/5600-5575/5550 may again fall to 5500/5450-6375/5350 and 5250/5200-5175/5100 and further 5000/4900*-4850/4825 and 4745/4670-4595/4400* in the coming days.

Also, technically Gold (XAU/USD: 2410) has to sustain over 2435 for a further rally to 2455*/2475-2500*/2525 and 2550/2575-2600/2650 in the coming days; otherwise sustaining below 2425/2390-2375/2355, may further fall to 2320/2300-2290/2275* in the coming days.