Nasdaq Rallies in Past 4 Weeks Amid Inflation Fear: 5 Picks

·6-min read

Over the past one and a half months, market participants are speculating an impending inflation in the U.S. economy. The spike in core consumer price index (CPI) data for April and May and April's core PCE price index — Fed's favorite inflation gauge — have made investors jittery about investing in equities.

Meanwhile, inflation is expected to affect the growth-oriented space like technology the most as its players generally depend on easy access to cheap credit to expand their businesses.

Any inflation may compel the Fed to gradually stop the ongoing bond-buying program and finally to raise the benchmark lending rate. Consequently, the net present value of investment in growth stocks will decline as long-term returns of these stocks will diminish due to a higher discount rate.

However, surprisingly, the tech-laden Nasdaq Composite Index has rallied in four consecutive weeks. The teach-heavy index has surged 7.2% from May 13 to Jun 13. At this stage, it may be fruitful to invest in Nasdaq-listed technology behemoths (market capital > $100 billion) with a favorable Zacks Rank.

Fed is Yet to Trigger Inflation Button

Recent concerns over an impending inflation may not be alarming. The Fed has reiterated so far that any inflation in 2021 will be transitory. The recent spike in the last two month's inflation data may be due to the extremely low-base of pandemic-ridden 2020. Additionally, problems related to supply chain disruptions and the shortage of workers are expected to settle gradually.

Fed Chairman Jerome Powell has said that the first signal of retreating from the ongoing easy-monetary policy will be a public discussion on terminating the quantitative easing program through which the central bank is purchasing $120 billion of treasury or mortgaged-back bonds per month to inject liquidity in the system.

A large section of economists and financial experts believe that even if the Fed changes its dovish monetary stance in the near future, it will take a few more months to actually implement the termination process of the quantitative easing program and then several more months to systematically reduce the bond-buying level to zero. Only after that the central bank will consider whether to raise the benchmark interest rate from the current range of 0-0.25%.

Notably, not all technology stocks will succumb to inflationary pressure. Technology is the best bet in the long term with vast potential. Technology bigwigs have a robust business model across the world and command globally acclaimed brand values. Their strong financial position will help them to cope with a higher interest rate.

It seems that investors' concerns about an impending inflation are already factored in market valuation. That is why all the three major stock indexes — the Dow, the S&P 500 and the Nasdaq Composite — rallied on Jun 10 and 11 despite the release of higher-than-expected CPI data for May. On Jun 11, the yield on the benchmark 10-Year U.S. Treasury Note fell below 1.43% for the first time in three months.

A Near-Term Catalyst

On Jun 8, in a majority voting, the U.S. Senate passed one of the largest bipartisan bill of committing around $250 billion in funding or scientific research, subsidies for chipmakers and robot makers, and an overhaul of the National Science Foundation.

The bill provides a package of $52 billion to boost semiconductor chip production and R&D activities over a period of five years. Notably, President Joe Biden also expressed his intention to provide a $50 billion budgetary support to accelerate semiconductor production and research.

Lawmakers are concerned that the United States had a 37% share of the global semiconductor and microelectronic production in 1990, which has drastically dropped to just 12% as of now. Consequently, U.S. businesses, especially the auto and high-tech industries are suffering from an acute shortage of chipsets owing to the breakdown of the global supply chain during the pandemic.

Additionally, the Asian giant China is aggressively spending more than $150 billion to boost semiconductor manufacturing and unsettle the United States from its global leadership in this key technology. These show the urgency of the U.S. Congress to strengthen its high-tech semiconductor industry.

Our Top Picks

We have narrowed down our search to seven U.S. technology bigwigs with strong growth potential for 2021 and a long-term (3-5 years) growth rate, which is higher than the market's benchmark S&P 500 Index's growth rate of 11%.

These stocks witnessed solid earnings estimate revisions within the last 30 days. Each of our picks carries either a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows price performance of our five picks in the past month.

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Image Source: Zacks Investment Research

Alphabet Inc. GOOGL has an expected earnings growth rate of 52.6% for the current year. This Zacks Rank #1 company has a long-term growth rate of 18.1%. The Zacks Consensus Estimate for the current year has improved 0.2% over the last 30 days.

Apple Inc. AAPL has an expected earnings growth rate of 57.6% for the current year (ending September 2021). This Zacks Rank #2 company has a long-term growth rate of 12.5%. The Zacks Consensus Estimate for the current year has improved 1.4% over the last 30 days.

NVIDIA Corp. NVDA has an expected earnings growth rate of 58.4% for the current year (ending January 2021). This Zacks Rank #1 company has a long-term growth rate of 17.6%. The Zacks Consensus Estimate for the current year improved 16.4% over the last 30 days.

Intuit Inc. INTU has an expected earnings growth rate of 19% for the current year (ending July 2021). This Zacks Rank #1 company has a long-term growth rate of 14.8%. The Zacks Consensus Estimate for the current year has improved 12% over the last 30 days.

Applied Materials Inc. AMAT has an expected earnings growth rate of 56.6% for the current year (ending October 2021). This Zacks Rank #2 company has a long-term growth rate of 18%. The Zacks Consensus Estimate for the current year has improved 11.2% over the last 30 days.

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