Is the Market Prepared for Fed Tapering Stimulus?

NASDAQ 100 FUNDAMENTAL FORECAST: NEUTRAL

• The Nasdaq 100 index may be vulnerable to a deeper pullback if tapering fears intensify
• The recent robust economic data raised the prospects of Fed tapering, although it may come in a slow and gradual manner
• The Nasdaq 100 index is trading at 36.1 times price-to-earnings, about 2-SD above its five-year mean

The technology sector traded on the back foot towards the end of the week amid tapering fears after a robust ADP private payrolls report. The private sector added 978k jobs in May, hitting an eleven-month high and smashing the baseline forecast of a 650k increase (chart below). The pace of job creation appears to have accelerated over the past three months, underscoring a strong recovery in the labor market. Meanwhile, weekly jobless claims fell to a fresh pandemic low of 385k, versus a 390k forecast.

This led to a sharp rebound in the US Dollar and longer-dated Treasury yields, reflecting that the market is deeply concerned. Theprospects of Fed tapering stimulus strengthened after Philadelphia Fed President Patrick Harker said it is appropriate “to slowly, carefully move back” on bond purchases at an appropriate time.

Although several Fed officials reiterated that inflationary pressures might be “transitory”, market participants remain jittery about rising price levels. A Bloomberg poll shows that economists are expecting US headline CPI figure to hit 4.6% YoY in May – the highest reading since 2008. The recent surge in crude oil, metals and agriculture prices may be reinforcing this assessment.

It seems that conditions are gradually maturing to warrant a debate among Fed officials about tapering stimulus. The critical part is at what pace will the central bank scale back its $ 120 billion per month bond purchases and when will it start. Before a clearer picture is drawn on that prospect, the markets may be reluctant to move significantly higher.

US Nonfarm Payrolls vs ADP Private Payrolls – Past 12 Months

Source: Bloomberg, DailyFX

The Nasdaq 100 is trading at 36.1 price-to-earnings (P/E), which is around two standard deviations above its five-year mean. Nonetheless, the ratio has fallen by more than 10% from February’s level as earnings improved. The index’s forward P/E stands at 27.57, reflecting a further rise in earnings per share (EPS) in the quarters to come. A strong fundamental backdrop may cushion the index’s downside against tapering headwinds, and the recent drop in prices may offer another opportunity for long-term investors.

Nasdaq 100 Index vs. P/E Ratio – 5 Years

Source: Bloomberg, DailyFX

— Written by Margaret Yang, Strategist for DailyFX.com

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