The Nasdaq Composite closed at 20,034.89 for the first time on Wednesday, marking the new all-time high for the index. This remarkable achievement comes at the end of a year that has seen technology stocks increase, fueled by expectations of new breakthroughs in artificial intelligence as well as declining interest rates. The tech-heavy index stood at more than 33% in 2024 thanks to investors targeting companies such as Apple, Nvidia, Alphabet, and recently on Tesla.
Nasdaq reaches 20,000 thanks to Big Tech's AI-driven surge
It has been led most notably by tech firms, most especially Nvidia, which has lately developed endless incredible AI, and Tesla, whose stock has recently shot up in the weeks. The increase of the index was also supported by the stronger U.S. inflation data, which in turn strengthened the market’s expectation of the rate cut next week by the Federal Reserve.
Although it has gone through some bearish pressures, concerns about the continuation of the rally are growing. Market observers have lately grown concerned about the overall health of the Nasdaq given that the overall weight of its index has become increasingly concentrated in the shares of a few megacap stocks. Tech stocks remain strong and provide big returns this year; nonetheless, the highly concentrated funds have raised concerns about the disequilibrium of the stock market again.
Cameron Dawson, Chief Investment Officer at NewEdge Wealth, said that the rally may be driven by the “hunt for the end of the year," meaning investors are aiming for the revival of the key stocks that posted the best outcomes. He pointed out that as the price-to-earnings multiple and expectations are pulled further apart, it may become more challenging to deliver those high levels of returns through to 2025 should sentiment shift or growth under-promise.
The rebuff in Big Tech innovations has positively impacted those investors who included positions in high-growth industries. Nonetheless, the future looks indefinite, and as the Nasdaq emerges as a benchmark index of investors' stupendous run, they will have to tread cautiously in any possible risks associated with valuations of the existing market and the performance of technology stocks.
Nasdaq's Rollercoaster Ride: From Pandemic Plunge to AI-Powered Surge
It shows the Nasdaq Composite Index, which soared back to the pre-pandemic level after the early 2020 pandemic crash. The market dropped due to the bearish market and no activity globally; however, the market recovered very quickly due to the near-zero interest rate by the Federal Reserve and the extensive fiscal policies from the U.S. government. These actions went a long way to bring stability back to the economy and, more importantly, revive confidence in the tech stocks amongst investors.
However, the index was down again in 2022 and reduced by 33 percent when inflation hit higher levels that were last seen in 1981. The Federal Reserve then matched this action with a series of large rate hikes that would strive to combat higher prices. People feared that a recession was on the horizon, but it never came to fruition, and the Nasdaq is up roughly 90% since then, or at least AI-driven stocks are.
Specifically, the company that has benefited from a market recovery more than almost any other is Nvidia, the price of which, after falling to $145.75 in October 2022, has risen by over 1,100%. Nvidia’s chips that are central to AI technology are a darling of investors seeking to ride the AI wave. Such stocks have become the most sought after in the market due to excitement created by artificial intelligence, says Alex Morris, the chief investment officer at F/m Investments.
The AI-led charge has therefore revived optimism in high-growth technology shares, but the sustainability of such growth is doubtful. Even though there has been a tremendous increase in the Nasdaq and its DOW, some people have argued that the market has followed its trend of raising, and investors should be advised of the fact that it may lead to overvaluation. That being said, the prospects for additional development of AI markets are really there, and the long-term outlook, however, remains obscure.
Nonetheless, the Nasdaq’s recent rise does not put its valuation in the same historic stratosphere as it reached during the dot-com bubble at the turn of the century. This implies that even though the index has increased massively, it is still possible to increase it even more, so the existence of this AI-driven rally and the resilience of the economy.
Nasdaq at a Crossroads: Rising Valuations and Big Tech Dominance
Today there is a multiple of 36 for current year’s earnings, which is the highest level in three years and substantially above the long-term average of 27. Thus this can be considered some improvement, but still it doesn’t reach such a P/E ratio of roughly 70 registered in March 2000 in the frame of the dot-com bubble. This comparison provides some relief to the investors, but worries over the continued performance of the current rally still remain.
Jessica Rabe, co-founder of DataTrek Research, pointed out that today’s Nasdaq rally is far slower compared to the dramatic upswing seen in the late 90s and early 2000s. In this regard, Rabe pointed out that the current pace is slower than what we saw during the technology boom, which gives comfort to investors who may be worried that it will get to the same extent as the bubbles.
The escalating prevalence of megacap stocks has emerged as one of the main factors behind the benchmark Nasdaq run. SOME HIGHLIGHTS The top ten constitute 59 percent of the index from the current period, a rise from 45 percent in 2020. The three largest firms are Apple, Microsoft, and Nvidia, with contributions of 11.7 percent, 10.6 percent, and 10.3 percent to the index, respectively, from their whopping share price gains that have boosted the Nasdaq.
The problem is that when the focus is placed on half a dozen firms, this causes a number of issues. If the big tech stocks were to go sour, they could drag the Nasdaq down, as per the investor’s risk. The year 2022 is a painful example of how quickly tech companies such as Meta and Tesla became negatively impacted when their stocks fell below the $60 level.
Still, the Nasdaq is up this year more than other major US stock indexes, reaching 33% in 2024, while the S&P 500 was up 27% and the Dow Jones, 17%. Surpassing all expectations, the Nasdaq over the last decade has leaped from 320%, outclassing the S&P 500 at 200% and the Dow at 150%. This outperformance was sustainable and extends the debate as to whether the tech-heavy index is a signal of the index’s further robustness or invulnerability to downside risks tied to its increasing concentration.
