THE TRUMP EFFECT: Nasdaq Closes Above 20,000 for First Time Ever

The Nasdaq Composite Index reached the 20,000 milestone for the first time on Wednesday, capping off a year driven by enthusiasm for artificial intelligence and anticipation of lower interest rates, both of which ignited a powerful surge in technology stocks. The index, which is heavily weighted toward tech, has risen by over 33% this year, buoyed by massive gains in major tech companies such as Apple, Nvidia, Google-parent Alphabet, and, more recently, electric vehicle maker Tesla. The increase came after a U.S. inflation report that solidified expectations of an interest rate cut from the Federal Reserve next week. The Nasdaq ended Wednesday at 20,034.89, up 1.8% for the day.

This rally has greatly benefited investors with significant stakes in growth and technology stocks, but it has also raised concerns about soaring valuations and the growing dominance of megacap companies, whose influence on the index has become more pronounced. “There is clearly an aspect of a chase into year-end, where the winners … keep winning,” said Cameron Dawson, chief investment officer at NewEdge Wealth. “The question is if this momentum can persist into 2025, where stretched valuations, positioning, sentiment, and growth expectations could all present high bars to jump over to keep above-average returns going.”

After a steep decline in early 2020, triggered by the pandemic’s halt to global economic activity, the index quickly rebounded as the Federal Reserve slashed interest rates to nearly zero and the U.S. government launched extensive fiscal stimulus efforts. Despite a significant drop in 2022, when the index fell by 33% due to a surge in inflation and the Fed’s aggressive rate hikes, the anticipated recession never materialized. Since then, the index has surged nearly 90%, partly fueled by increasing optimism around the business prospects of artificial intelligence. Shares of Nvidia, whose chips are regarded as the best in the industry, have soared more than 1,100% from their low point in October 2022.

“The AI story still rings true and appeals to investors,” said Alex Morris, chief investment officer of F/m Investments. “These are the go-go stocks.” Although the Nasdaq’s valuation has risen, it remains far from the extreme levels it hit during the dot-com bubble more than 20 years ago. Currently, the index trades at around 36 times earnings, which is a three-year high and significantly above its long-term average of 27, according to LSEG Datastream. However, this is still well below the peak P/E ratio of 70 the index reached in March 2000, which provides some reassurance to investors drawing comparisons between the two periods.

“The Nasdaq Comp’s latest rally pales in comparison to the late 90s/early 2000 experience, rising more gradually and does not yet look unsustainable as a result,” Jessica Rabe, co-founder of DataTrek Research, noted in a report on Wednesday. The Nasdaq’s top-heavy composition has become more apparent, with the 10 largest companies by market value now accounting for 59% of the index, up from 45% in 2020. The three largest companies—Apple, Microsoft, and Nvidia—make up 11.7%, 10.6%, and 10.3% of the index, respectively.

Although the surge in these companies’ stock prices has propelled the Nasdaq, this heavy concentration could pose a risk if Big Tech’s popularity wanes. For example, the 2022 market downturn saw shares of major index components like Meta and Tesla plummet by 64% and 65%, respectively. This year, the Nasdaq has outperformed other major U.S. stock indexes, driven by the strong performances of Nvidia, Amazon, and Meta Platforms. The tech-heavy index’s 33% rise in 2024 compares favorably to the S&P 500’s 27% increase and the Dow Jones Industrial Average’s 17% gain.

Over the past decade, the Nasdaq has surged by over 320%, outpacing the S&P 500’s 200% growth and the Dow’s 150% increase.

{Matzav.com}