The Nasdaq Composite Index achieved a historic milestone on Wednesday, reaching 20,000 for the first time, driven by enthusiasm surrounding artificial intelligence and anticipated interest rate reductions that propelled technology stocks to remarkable heights.
The technology-focused index has risen over 33% this year, led by major tech firms including Apple, Nvidia, Alphabet, and recently Tesla. The gains on Wednesday followed a US inflation report that strengthened expectations for a Federal Reserve rate reduction next week.
The index concluded Wednesday’s trading at 20,034.89, representing a 1.8% daily increase.
The current rally has benefited investors focused on growth and technology sectors, whilst raising concerns about elevated valuations and the increasing influence of large-capitalisation stocks within the index.
“There is clearly an aspect of a chase into year-end, where the winners … keep winning,” stated 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.”
Following its early 2020 decline during the pandemic-induced economic standstill, the index recovered swiftly as the Federal Reserve reduced interest rates to near-zero and the US government implemented substantial fiscal stimulus measures.
The index experienced a significant decline in 2022, dropping 33% amidst 40-year high inflation rates and aggressive Federal Reserve rate increases. However, despite higher rates, the anticipated recession did not materialise, and the index has surged approximately 90% since then, partly due to growing enthusiasm about AI’s commercial potential.
Nvidia shares, whose chips are regarded as industry-leading, have increased more than 1,100% from their October 2022 low.
“The AI story still rings true and appeals to investors,” noted Alex Morris, chief investment officer of F/m Investments. “These are the go-go stocks.”
Despite the Nasdaq’s increased valuation, it remains significantly below levels seen during the dot-com bubble of the late 1990s.
The index currently trades at approximately 36 times earnings, a three-year peak exceeding its long-term average of 27, according to LSEG Datastream. This remains well below the roughly 70 times P/E ratio reached in March 2000, providing some reassurance to investors comparing the two periods.
Large-capitalisation stocks increasingly dominate the index, with the top 10 companies representing 59% of the Nasdaq, compared to 45% in 2020. Apple, Microsoft, and Nvidia hold the largest weightings at 11.7%, 10.6%, and 10.3% respectively.
Whilst their rising share prices have boosted the Nasdaq, this concentration could pose risks should large technology companies lose favour. The 2022 downturn saw significant declines in major components, with Meta and Tesla falling 64% and 65% respectively.
The Nasdaq has outperformed other major US indices this year, driven by substantial gains in heavily weighted companies like Nvidia, Amazon, and Meta Platforms. Its 33% increase in 2024 surpasses the S&P 500’s 27% and Dow Jones Industrial Average’s 17% gains.
Over the past decade, the Nasdaq has gained over 320%, compared to the S&P 500’s 200% and the Dow’s 150% increase.
(With inputs from agencies)
