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By Saqib Iqbal Ahmed, Suzanne McGee and Lewis (JO:LEWJ) Krauskopf
NEW YORK (Reuters) – The Nasdaq Composite Index hit 20,000 for the primary time on Wednesday, placing an exclamation level on a yr wherein pleasure over synthetic intelligence and expectations of falling rates of interest fueled a searing rally in know-how shares.
The tech-heavy index is up greater than 33% on the yr, pushed by a cluster of large technology-focused firms together with Apple (NASDAQ:AAPL), Nvidia (NASDAQ:NVDA), Google-parent Alphabet (NASDAQ:GOOGL) and in latest weeks, electrical carmaker Tesla (NASDAQ:TSLA). Wednesday’s positive factors got here after a U.S. inflation report that cemented expectations of a Fed fee reduce subsequent week.
The index closed on Wednesday at 20,034.89, up 1.8% on the day.
Whereas the rally has rewarded traders who went large on development and tech, it has additionally stirred unease over rising valuations and the dominance of megacap shares, which now have an more and more heavier weighting within the index.
“There may be clearly a facet of a chase into year-end, the place the winners … preserve successful,” mentioned Cameron Dawson, chief funding officer at NewEdge Wealth. “The query is that if this momentum can persist into 2025, the place stretched valuations, positioning, sentiment, and development expectations may all current excessive bars to leap over to maintain above-average returns going.”
After plummeting in early 2020 when the pandemic introduced international financial exercise to a standstill, the index mounted a swift rebound because the Federal Reserve reduce rates of interest to near-zero and the U.S. unleashed waves of fiscal stimulus to assist the economic system.
It endured a pointy drop in 2022, falling 33% as inflation surged to 40-year highs and the Fed was compelled to ship a sequence of jumbo fee cuts. However larger charges didn’t convey on a widely-expected recession, and the index has soared by about 90% since then, stoked partially by rising pleasure over the enterprise potential of AI.
Shares of Nvidia, whose chips are thought-about the trade’s gold commonplace, are up greater than 1,100% from their October 2022 low.
“The AI story nonetheless rings true and appeals to traders,” mentioned Alex Morris, chief funding officer of F/m Investments. “These are the go-go shares.”
Whereas the Nasdaq’s valuation has climbed, it’s nonetheless removed from ranges it reached in the course of the dot-com bubble greater than twenty years in the past.
The index trades at roughly 36 occasions earnings right now, a three-year excessive and nicely above its long-term common of 27, in response to LSEG Datastream. That’s nonetheless nicely under the roughly 70 occasions the index’s P/E ratio reached in March 2000, bringing a measure of consolation to traders evaluating the 2 durations.
“The Nasdaq Comp’s newest rally pales compared to the late 90s/early 2000 expertise, rising extra progressively and doesn’t but look unsustainable because of this,” Jessica Rabe, co-founder of DataTrek Analysis, mentioned in a word on Wednesday.
Megacap shares more and more dominate the index. The highest 10 firms by market worth account for 59% of the Nasdaq, in comparison with 45% in 2020. The three greatest firms by weight are Apple, Microsoft (NASDAQ:MSFT) and Nvidia, which account for 11.7%, 10.6% and 10.3% of the index respectively.
Whereas their surging share costs have buoyed the Nasdaq, the heavy focus may current an issue for traders ought to Massive Tech fall out of favor. The selloff in 2022, as an illustration, noticed shares of index heavyweights Meta and Tesla fall 64% and 65% for the yr respectively.
The Nasdaq has topped the opposite main U.S. inventory indexes this yr, propelled by large positive factors in closely weighted names corresponding to Nvidia, Amazon (NASDAQ:AMZN) and Meta Platforms (NASDAQ:META). The tech-heavy index’s 33% climb in 2024 compares with over 27% for the S&P 500 and 17% for the Dow Jones Industrial Common.
Over the previous decade, the Nasdaq has gained greater than 320%, in opposition to a 200% rise for the S&P 500 and a 150% improve for the Dow.
