15.05.2023
Macro > AI
The NASDAQ is back in a macro regime. Qi model confidence is back above our 65% threshold for the first time in 5 months.
Understanding macro was critical for US tech stocks for most of 2022 but the regime changed in October and by January model confidence fell as low as 28% - US technology was more a function of the hype around generative AI than macro fundamentals.
Understanding macro was critical for US tech stocks for most of 2022 but the regime changed in October and by January model confidence fell as low as 28% - US technology was more a function of the hype around generative AI than macro fundamentals.
The AI buzz is unlikely to go away. It has the potential to be a genuine game changer and investors will always be searching for the winners and losers.
But now investors need to be aware that it is no longer the only game in town.
What does the new regime look like?
But now investors need to be aware that it is no longer the only game in town.
What does the new regime look like?
Most financial commentary will argue that low bond yields are the primary driver of Growth plays. Qi largely agrees with this but with an important nuance.
It is not the level of 10y yields. Measuring the independent patterns of association shows the NASDAQ is currently completely insensitive to real rates.
Instead it is rate volatility and the shape of the yield curve that matter more.
Rate volatility is the single biggest driver accounting for around a quarter of the model's explanatory power. Qi employs swaption vol rather than bond vol but basically the fall in the MOVE is a big positive for tech stocks.
Similarly the shape of the 5s30s yield curve has become the biggest positive driver. A steeper curve is consistent with a NASDAQ rally.
Model value has rise strongly in the last month, driven primarily by these two factors.
It is not the level of 10y yields. Measuring the independent patterns of association shows the NASDAQ is currently completely insensitive to real rates.
Instead it is rate volatility and the shape of the yield curve that matter more.
Rate volatility is the single biggest driver accounting for around a quarter of the model's explanatory power. Qi employs swaption vol rather than bond vol but basically the fall in the MOVE is a big positive for tech stocks.
Similarly the shape of the 5s30s yield curve has become the biggest positive driver. A steeper curve is consistent with a NASDAQ rally.
Model value has rise strongly in the last month, driven primarily by these two factors.
The other big theme in this new regime is a desire for reflation. NASDAQ wants stronger commodities, tracking GDP growth and rising inflation expectations.
The attribution chat above shows the fall in these factors recently has been a headwind for macro-warranted model value. But, thus far, the move in the bond market has more than offset them.
What about valuation?
The attribution chat above shows the fall in these factors recently has been a headwind for macro-warranted model value. But, thus far, the move in the bond market has more than offset them.
What about valuation?
NDX screens as 1.1 standard deviations (6.4%) rich to macro fair value. The buzz around AI means a lot of good news is priced in. But critically model value is trending higher. It has risen 1.67% in the last month. Macro momentum is improving for US technology.
The bottom line is Qi would not portray current levels as an attractive entry point. But to turn outright bearish would require the red line above to roll over. Given Qi identifies the key drivers we are now forewarned on potential risk scenarios.
* a spike in rate vol - US debt ceiling impasse? - would be a clear bearish catalyst.
* ditto deflation and renewed yield curve flattening
Finally, what about risk aversion and the argument mega cap tech stocks are safe haven assets? Does that negate the risks above?
On current patterns, the NASDAQ has very little sensitivity to VIX. That might provide some relief in a 'risk off' move. But risk aversion is not (yet) a positive driver. It is, however, for Apple and Meta and given their importance this will require close monitoring.
Net-net, keep a close eye on Qi model value which will aggregate all these crosswinds into a single snapshot of overall macro momentum.
The bottom line is Qi would not portray current levels as an attractive entry point. But to turn outright bearish would require the red line above to roll over. Given Qi identifies the key drivers we are now forewarned on potential risk scenarios.
* a spike in rate vol - US debt ceiling impasse? - would be a clear bearish catalyst.
* ditto deflation and renewed yield curve flattening
Finally, what about risk aversion and the argument mega cap tech stocks are safe haven assets? Does that negate the risks above?
On current patterns, the NASDAQ has very little sensitivity to VIX. That might provide some relief in a 'risk off' move. But risk aversion is not (yet) a positive driver. It is, however, for Apple and Meta and given their importance this will require close monitoring.
Net-net, keep a close eye on Qi model value which will aggregate all these crosswinds into a single snapshot of overall macro momentum.
