NASDAQ Index Forecast For 2024: Driven By AI, NASDAQ May Test 19,000

Key Insights

• NASDAQ rallied in 2023 as traders rushed to buy AI-related stocks. 
• AI will likely remain the key driver for NASDAQ index in 2024.
• The current trend is strong, and NASDAQ has a good chance to test the 19,000 level next year. 

2023 Market Recap

The year 2023 was a wonderful year for those who decided to bet on NASDAQ. The index is up by more than 50% year-to-date. NASDAQ experienced a material correction from July to October but finished the year with a strong rally. As a result, RSI moved into the overbought territory.

AI hype was the key driver for NASDAQ index this year as traders rushed to buy any AI-related stocks. Mega caps, chipmakers and smaller companies benefited from AI hype, sending NASDAQ to historic highs.

It looks that the last leg of the rally was partially driven by short-covering as short-sellers have likely initiated positions near the 16,000 level. When NASDAQ settled above 16,000, these short-sellers were forced to close their positions to protect themselves from margin calls. Fear of missing out (FOMO) also played a role in NASDAQ’s strong performance in December.

Global Economic Outlook

IMF predicts that global economy would grow by 2.9% in 2024, while the U.S. economy would increase by 1.4%. The latest economic projections from the Fed imply growth of 1.4%, which was revised from September projection of 1.5%.

At this point, the market consensus is that Fed will manage to orchestrate a soft landing and U.S. economy will avoid a recession. Fears of a banking crisis have not materialized, and the major pullback in Treasury yields has likely provided material support to weaker banks. The recent PMI reports suggest that the manufacturing sector remains under pressure, but the strong services sector provides significant support to U.S. economy.

For the tech-heavy NASDAQ, the current challenges of the manufacturing sector do not present a real problem. In case the economy avoids a recession, which is the base case scenario, NASDAQ traders would focus on key things like the potential of AI technologies.

Technological Advancements and Sector Growth

The year 2024 will be a real test for AI hype. AI-related stocks have shown strong performance in 2023 as traders bet that companies would reap significant profits from the emerging technology.

As a result, their valuation reached high levels. Microsoft, which is believed to be one of the main beneficiaries of the new trend, is trading at almost 30 forward P/E. NVIDIA and Alphabet are valued above 20 forward P/E.

Such multiples imply strong growth for the upcoming years. Keep in mind that we are talking about stocks that are valued in the $1.2 trillion – $2.8 trillion range, and it remains to be seen whether companies would be able to grow at a fast pace to attract new investments.

Monetary Policies and Interest Rates

The Fed is widely expected to start cutting rates in 2024. FedWatch Tool shows that the federal funds rate may be cut as soon as March 2024.

However, traders should note that NASDAQ showed little correlation with interest rates in 2023. Treasury yields have been moving higher until October, but NASDAQ index had an incredibly strong start of the year.

Thus, it remains to be seen whether rate cuts will provide material support to NASDAQ index, although lower interest rates will boost liquidity, which is bullish for equity markets.

Geopolitical Factors

The state of U.S. – China relations is the key geopolitical catalyst for the NASDAQ index in 2024. U.S. wants to cut China’s access to top technology and has already introduced multiple measures to curb China’s technological development.

These measures have a direct impact on companies like NVIDIA, which cannot sell certain chips to China. These high-end chips are, of course, among the most profitable products. Chipmakers try to circumvent restrictions by introducing weaker chips that are specifically designed for China. Meanwhile, Chinese companies rush to develop their own chips as the country’s government is afraid that U.S. restrictions will become harsher in the future.

Most likely, U.S. will put more pressure on China in the next year. However, demand for top chips is so strong that U.S. companies should not feel a strong impact from new restrictions in the near term.

Market Risks and Opportunities

The key risk for the NASDAQ index is its dependence on mega cap stocks. It takes a lot of money to push a stock like Microsoft to new highs. The interest rates stay high, while the Fed continues its quantitive tightening program to fight inflation.

At the same time, investors will have access to cheaper money as yields are falling, so they will have an opportunity to increase their purchases of high-flying tech stocks.

There’s another important catalyst to consider when thinking about the concentration risk. Any fund manager wants to either beat the index or at least show an equal performance. If mega cap stocks that move the index gain strong upside momentum, fund managers are basically forced to allocate funds into them to avoid falling behind the index. This positive feedback loop often creates a strong trend.

TA Forecast for 2024

Taking a look at the weekly chart, NASDAQ settled at all-time high levels. Thus, there are no resistance levels above 16,900, and traders will simply have to follow the trend.

RSI has recently moved into the overbought territory, so the risks of a pullback are increasing. For many traders, it is hard to ignore high RSI on a weekly chart as it suggests that the asset is indeed overbought.

However, NASDAQ experiences periods of high RSI on a weekly chart from time to time as the tech-heavy index often has a strong trend. In this light, it remains to be seen whether we will see a strong pullback in the first months of 2024.

Taking a look at the big picture, NASDAQ has just moved above the previous highs that were reached back in 2021 and has a great chance to develop strong upside momentum. It will be hard to repeat the performance of this year, but gaining another 15% is a realistic target, so NASDAQ may easily test the 19,000 level in 2024.

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