Risks are Bubbling in the Nasdaq-100

The Nasdaq-100 has led this cycle, driven by U.S. economic resilience and an unprecedented investment surge in artificial intelligence and cloud infrastructure.

However, risks are emerging from overvaluation, excessive AI spending that has yet to translate into revenue, and geopolitical uncertainties tied to the Trump administration.

With the Nasdaq-100 trading below its all-time high and lacking sufficient catalysts for a breakout, a near-term correction could occur if these risks materialize. Investors may consider a short position to capitalize on this potential downturn.




AI Spending and Overvaluation Risks

The "Magnificent Seven"—Apple, Microsoft, Nvidia, Amazon, Alphabet, Meta, and Tesla—have dominated market sentiment, collectively accounting for approximately 63% of the Nasdaq-100's total market cap. This highlights the rally's extreme concentration.

Much of the momentum has been driven by high expectations for rapid growth in artificial intelligence, further amplifying the market's reliance on these key players.



The broader backdrop has also been supportive: US economic growth continues to surprise to the upside, with growth expected at 2.3% for the year, while corporate earnings—even more so for tech—are likely to rise 7-14%, as per multiple analyst outlooks.

However, recent earnings reports have injected caution into AI enthusiasm. Alphabet missed revenue forecasts, sending its stock down 7.3%, while AMD dropped 6.3% after weak data-center sales. Amazon's AWS posted 28.79B in revenue, just shy of the 28.84B estimate, raising concerns over AI over-spending.

Despite this, AI capex remains aggressive. Meta reaffirmed its $60-65B 2025 capex plan, despite 17B in Metaverse losses last year. Microsoft defended its Azure and OpenAI bets, while Alphabet, despite AI competition pressures, is committing 75B to AI infrastructure in 2025.

With ambitions and excitement all around, the market’s reaction toward these companies, in light of underwhelming earnings and efficient competition from China, has not been so forgiving.

Cracks are forming, and a more cautious approach to Nasdaq-100 exposure may be warranted.

Valuations are stretched, with the index’s forward P/E ratio at 34, up from 28 in 2023. While the AI boom, particularly in consumer adoption, took off in early 2023, the market is now pricing in near-flawless execution—yet investors have yet to fully grapple with the rising costs, intensifying competition, and looming regulatory scrutiny.

Risks remain in some of the largest Nasdaq-100 stocks, particularly Nvidia and Tesla. Nvidia’s price-to-earnings (P/E) ratio of 50.7 raises concerns about its ability to sustain past explosive growth. Similarly, Tesla, with a P/E ratio of 183.6, faces headwinds from a slowdown in the EV industry, making its valuation increasingly vulnerable.


Political and Trade Uncertainty

Donald Trump’s return to the White House has generated significant energy and excitement. However, the extremity of his policies could create new trade uncertainties, particularly for companies dependent on Chinese supply chains and international revenue.

Since his inauguration, Trump has announced a series of tariffs against major trading partners. The risk of retaliatory measures raises the possibility of a full-blown trade war. His aggressive stance on trade could introduce sudden and unpredictable market volatility.

The previous trade war saw tariffs disrupt global tech supply chains and put pressure on corporate margins. For instance, in 2018-2019 Nasdaq-100 volatility spiked and tech earnings growth slowed.

If history repeats itself, the overextended valuations of Nasdaq-100 could probably get a reality check, particularly if these firms start guiding for higher costs in upcoming earnings calls.




Technicals Point to Upcoming Resistance



The moving averages for the Nasdaq-100 reflect a bullish sentiment owing to the strong rally for the past several months.

However, the ATH level of 22,100 has proven strong resistance with prices testing this level multiple times over the past few months. A strong catalyst may be required to pass this level.

During previous corrections, price has reached between the 50-day and 100-day simple moving average (SMA).



Momentum indicators suggest that a short-term downward trend may be imminent.



Periodic movements in the index suggest a downturn is imminent and prices may reach as far as the S1 pivot point at 20,700.


Options Signal Growing Bearish Sentiment

Options positioning on E-mini Nasdaq-100 futures and Micro E-mini Nasdaq-100 futures signals a bearish sentiment. OI and volume put/call ratio for both E-mini NQ and Micro E-mini NQ are greater than 1 suggesting higher put positioning than call. There is a particualrly high concentration of puts at the March expiry.

Source: CME QuikStrike

Hypothetical Trade Setup

Given the frothing risk factors impacting the Nasdaq-100, risk of a sharp decline is high. Elevated valuations, escalating trade tensions, and slowing AI rally, all risk a correction in the index.

This decline may materialize in the next 2–3 weeks, aligning with critical macroeconomic events, including Federal Reserve announcements, inflation data releases, and upcoming corporate earnings reports.

With a correction likely, investors can express this view using a short position in Micro E-mini Nasdaq 100 (MNQ) futures expiring in March (MNQH2025). Each contract requires initial margin of USD 2,303 as of 10/Feb and provides exposure to USD 2 x Nasdaq index (~43,400).

Investors can also use the standard E-mini NQ futures to express the same bearish view with larger notional sizes.



Entry: 21,700
Target: 21,200
Stop Loss: 22,100
Profit at Target: USD 1000 ((21,700-21,200) x 2)
Loss at Stop: USD 800 ((21,700-22,100) x 2)
Reward to Risk: 1.25x

CME Group lists a raft of products covering a range of asset classes more accessible while also enabling granular hedging for portfolio managers.

Portfolio managers can learn more on how to access these micro products by visiting CME Micro Products page on CME portal to discover micro-sized contracts to gain macro exposures.



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MARKET DATA

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