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Nasdaq rally: Why analysts are warning it may not last

The Nasdaq is up about 5% in May. But the rally in tech stocks may not last, according to a strategist from Citi. Yahoo Finance Live's Seana Smith breaks down the rally: what has been driving it and why it may come to an end.

Video transcript

- Well, let's start with our Call of the Day. Tech stocks are enjoying an impressive run so far this year. The NASDAQ composite is up just about 25% year to date. And while investors are bullish on the tech sector right now, Citigroup strategist Chris Montague says, it's the rally has a risk of losing steam. And here to break down the massive news we've seen in tech is Yahoo Finance's own Seana Smith. Hey, Seana.

SEANA SMITH: Hey there, Rachelle. Let's take a look at the massive gains that we've seen since the start of this year. Now, this probably isn't a surprise to many given the fact that the AI frenzy has really been driving the investor narrative at least, as of late. But the NASDAQ 100, we're looking at gains of just over 30% since the start of the year.

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So this massive rally that we have seen play out in the sector is causing some on the street to warn that, hey, maybe some of this frenzy, we need to take a break. It doesn't have enough to maintain this type of momentum. At least, that is what we're hearing from Citi's Chris Montague, like you just said. He was out saying that this massive rally that we've seen, we might see it start to fizzle out just a little bit.

And he was taking-- pointed to two things that we're seeing. One, long positions in the NASDAQ 100. Right now, they're at a three-year high. And also when you just take a look at these profit levels, they are very elevated right now, so investors are at risk if we do start to see some profit taking from these levels.

Taking a look at exactly what we have seen play out in just the month of May alone. We have this chart here from Bloomberg. And we highlight just the massive jump that we have seen in May, up just about 8%. That is the best month of May that we have seen in 18 years. So really just highlights some of that frenzy that we have seen playing out right now.

When you take into account what is actually driving it, two things-- one that AI frenzy, but also this bet from traders that we will see. The Fed pause its rate hiking cycle, some things that they have been waiting on now for quite some time. When you take a look inside the sectors here, the XLK, the tech sector ETF, that's up 32% so far this year, taking a look at that year to date chart. And it really has certainly been the steady climb up.

Now, we know the tech sector was under a tremendous amount of pressure in 2022. So the thought here is when we talk about all this hype surrounding AI, maybe this is starting to turn into this FOMO type of trade, this fear of missing out, and of course, that is raising some alarm bells here on the street just in terms of what exactly that could mean.

When we talk about the AI frenzy, take a look at how often AI was mentioned in earnings call this past quarter. So it was mentioned just over 110 times. That's up 40% on a quarter over quarter basis. So it almost seems like companies that aren't even have exposure to AI just yet, they're mentioning it, saying that they want to get into the space given the appetite that we're seeing from investors as of late.

And taking a look at some of the outperformance that we've seen in individual names within the tech sector. Certainly, a lot of those larger cap tech giants have really been setting the pace here. Year to date gains, look at that. In Apple, up nearly 40%, Amazon up over 40% here. Meta, one of the names that has been playing up the position that they have in AI. Those year to date gains, up just around 120%.

But we've got to look at NVIDIA, that's certainly been one of the outperformers, massive outperformers since January 1st, up nearly 170%. We've seen a number of the chip stocks also riding that wave, riding that excitement into AI. So we'll see whether or not that holds.

But again, the fact that we have seen such a massive run up since the start of the year that's causing some analysts on the street to warn that, hey, maybe now's not the best time to jump in. Maybe wait for that pullback, and then start to reenter some of these very, very popular names. And that is certainly what we're hearing from Citi's Chris Montague today.

- Well, certainly as we look at NVIDIA, they're off to the races, though, indeed. Well, thank you there for that update. Seana Smith there for us.