Editor's Note: Matt Weller is the global head of research with GAIN Capital (StoneX Group), and Fiona Cincotta is a senior market analyst with GAIN Capital (StoneX Group). The article reflects the authors' opinions and not necessarily the views of CGTN.

U.S. President Biden and House Speaker McCarthy struck a debt ceiling deal in principle over the weekend, but still need to sell it to their caucuses in the House and Senate by the extended June 5 deadline.

U.S. stocks are pointing to a stronger start jumping on hopes that a U.S. debt default will be avoided and as chip stocks continue to charge higher.

Debt ceiling bill, hawkish Fed bets & U.S.consumer confidence data due

Biden and McCarthy agreed on a deal to lift the $31.4 trillion debt ceiling, which now must be approved by Congress. 

This is unlikely to be an easy ride, given the Republican control over the House and the Democrat control of the Senate. Still, with every move forward, there is less risk of a U.S. debt default.

The House Committee will meet this week to discuss the debt ceiling bill. While some hard-line Republicans have said that they will oppose the bill, the market remains upbeat.

Spending limits are expected to be applied starting with the fiscal year start of October, though it is possible small effects could emerge before through clawbacks of COVID-19 assistance and phasing out student debt assistance. 

Most impactful for the broader economy is the cap on government spending potentially limits a U.S. economy burdened by the high interest rates and restricted credit access. 

Federal and state spending has helped support U.S. growth so far, but this assistance could fade.

The upbeat mood at the moment is helping stocks rise higher, extending gains from last week, after Nvidia's impressive outlook.

Looking ahead, U.S. consumer confidence data is due and is expected to fall to 99 in May from 101.3. The data comes after core PCE (Personal Consumption Expenditures Price Index) data, the Fed's preferred inflation gauge unexpectedly rose in April to 4.7%, fueling Fed rate hike bets.

The market is now pricing in a 59% probability of a rate hike in June up significantly from last week. Multiple rate cuts are no longer expected this year.

Economists recently surveyed by Bloomberg signaled a 0.5-percent annualized drop in GDP for both the third and fourth quarters, and this group put the chances of a recession in 2024 at 65 percent. 

On the flip side, a slowing economy – still not evident in recent economic data – could persuade the Fed to make no change in interest rates at their mid-June policy meeting. 

Fed futures now indicate a final 25-basis-point hike in July.

Stock market outlook

Despite the uncertainties around the debt ceiling negotiations, the Nasdaq 100 has now surged by more than 5 percent in less than two days after Nvidia's stellar earnings, in another sign of a potential AI (artificial intelligence) bubble in the making.

Last Wednesday's earnings from chipmaking giant Nvidia have provided a shot of adrenaline for risk appetite, and the Nasdaq 100 has been by far the biggest beneficiary.

At this point, it feels inevitable that "The Great AI Boom of 2023" will become "The Great AI Bubble of 2023," if it hasn't already. But that doesn't mean that enthusiasm (and prices) can't go much higher in the interim. 

As billionaire investor George Soros famously quipped, "When I see a bubble forming, I rush in to buy, adding fuel to the fire."

It's clear from this quarter's earnings conference calls that many companies have the same idea: (Editor: Refers to chart below).

Of course, the risk with hopping on such an obvious trend is being the "greatest fool," or the last one to buy right at the top, but with continued positivity around a potential debt ceiling deal and this morning's core PCE report showing a more resilient U.S. economy than expected, there are other fundamental storylines supporting today's rally in the Nasdaq 100.

Since Nvidia's earnings after the bell on Wednesday, the Nasdaq 100 has rallied by more than 5 percent in less than two days, bringing the year-to-date return for the tech-heavy index to more than 30%.

Looking at the chart (below), the situation is relatively clear: The Nasdaq 100 remains in a strong uptrend, though prices are undoubtedly overbought in the short term, raising the risk of a pullback next week. 

If the short-term rally continues, the next notable resistance level to watch is the 61.8 percent Fibonacci retracement of the recent bear market near 14,355, with room up to the Q1 2022 highs above 15,000 if bulls can clear that hurdle.

Meanwhile, more conservative traders may prefer to wait for a pullback toward 14,000 next week to join the uptrend at a potentially more favorable price. 

Only a confirmed close back below previous-resistance-turned-support at 13,700 would erase the near-term bullish bias.