Strong Payrolls, Imminent CPI: Can the Nasdaq Continue to Surge?

TradingKey - As the newly released U.S. non-farm payroll data propelled the Nasdaq to a new record high, market attention has shifted to the April CPI data due next week.

On May 8 ET, the U.S. released its latest non-farm payroll (NFP) report. The data showed that the U.S. added 115,000 jobs in April, significantly higher than the market expectation of 62,000, while the unemployment rate held steady at 4.3%. The March figure was also revised upward to 185,000. Following the release, the Nasdaq rose 1.71% that day to close at 26,247.08 points, hitting another record high.

This employment report suggests that expectations for a soft landing for the U.S. economy remain achievable. Market sentiment indicates that investors interpret this data as a sign of continued resilience in the labor market, which is at least not yet sufficient to trigger recession fears.

Meanwhile, AI-related industries continue to provide support for employment and corporate spending, and earnings in the tech sector have not been undermined by macro data. The market consensus remains that the primary driver for U.S. stocks continues to be earnings growth and AI capital expenditure; as long as the economy does not significantly weaken, growth stocks still have potential for further gains.

However, this non-farm payroll data has also pushed back interest rate cut expectations. The resilience of U.S. employment, combined with the resurgence of inflationary pressures since April, makes it more difficult for the Federal Reserve to pivot toward easing soon. According to the latest Reuters survey, an increasing number of Wall Street institutions have begun to scale back or even eliminate their expectations for rate cuts this year, with Barclays becoming the latest firm to bet on no rate cuts in 2024.

For the Nasdaq Composite, future performance will depend more heavily on a substantive improvement in corporate profitability to support current high valuation levels.

With the non-farm payroll data now in the books, the market is turning its attention toward the U.S. April CPI release next Tuesday.

Bank of America (BofA) expects the April CPI to rise 0.5% month-over-month and reach 3.7% year-over-year, primarily driven by a 4.3% month-over-month increase in energy prices resulting from the conflict involving Iran.

Core CPI is projected to increase 0.3% month-over-month and rise to 2.7% year-over-year. BofA noted that the U.S. government shutdown last year led to adjustments in rent data, and rental factors could drive core CPI higher.

For the Nasdaq, the impact of CPI is more direct than that of non-farm payrolls because it influences long-term interest rates and real yields—the variables to which high-valuation tech stocks are most sensitive.

From a technical perspective, the Nasdaq still finds short-term support. The stronger-than-expected non-farm payrolls indicate that the economy has not slowed significantly, and AI and chip stocks continue to provide upward momentum, as evidenced by Friday's record high.

However, the ultimate factor determining whether this rally can continue is the April CPI. If the CPI data is moderate, the Nasdaq is likely to maintain its strong structural trend, with capital continuing to focus on earnings growth and AI capital expenditure. Conversely, if the CPI exceeds expectations, the market will quickly push back rate cut expectations, and valuation pressures on tech stocks will resurface.

Nasdaq Composite Index Weekly Chart, Source: TradingKey

From a technical analysis standpoint, the Nasdaq is currently approaching the Fibonacci 0.618 extension level at 26,398.07, suggesting a possibility of a short-term pullback. However, if the April CPI data proves moderate, the Nasdaq could break through this level, opening up further upside potential to test the Fibonacci 0.786 extension at 27,949.71.