Stunning rally in big tech stocks pushes Nasdaq to 20,000

AI excitement, rate cut expectations Nasdaq hits 20,000

Tech stocks push Nasdaq up 33% for year

Large-cap dominance raises concentration concerns

Authors: Saqib Iqbal Ahmed, Suzanne McGee and Lewis Krauskopf

NEW YORK, Dec 11 (Reuters) – The Nasdaq Composite hit 20,000 points for the first time on Wednesday, putting an exclamation point on a year as excitement about artificial intelligence and expectations of lower interest rates fueled strong gains in technology stocks.

The tech-heavy index is up more than 33% this year, driven by a bevy of tech-focused giants including Apple, Nvidia, Google parent Alphabet and, in recent weeks, electric carmaker Tesla. . Wednesday’s gains came after a U.S. inflation report solidified expectations for a rate cut from the Federal Reserve next week.

The index closed at 20,034.89 points on Wednesday, up 1.8% on the day.

While the stock market rally has rewarded investors with a penchant for growth and technology stocks, it has also stoked jitters over rising valuations and the dominance of megacap stocks, which now weigh increasingly heavily in the index. big.

“There’s clearly an aspect to the year-end chase, and the winners … are going to continue to win,” said Cameron Dawson, chief investment officer at NewEdge Wealth. “The question is whether this momentum can continue into 2025, when valuations , positioning, sentiment and growth expectations are all likely to have high thresholds to maintain above-average returns.”

After plunging in early 2020 as the pandemic brought global economic activity to a standstill, the index quickly rebounded as the Federal Reserve cut interest rates to near zero and the United States launched waves of fiscal stimulus to boost the economy.

The index suffered a sharp decline in 2022, down 33%, as inflation surged to 40-year highs and the Federal Reserve was forced to implement a series of steep interest rate cuts. But higher interest rates did not bring about the widely expected recession, and the index has surged about 90% since then, driven in part by growing excitement about the business potential of artificial intelligence.

Nvidia’s chips are considered the gold standard in the industry, and the company’s shares are up more than 1,100% from their October 2022 lows.

“The AI ​​story still rings true and is attractive to investors,” said Alex Morris, chief investment officer at F/m Investments. “These are hot stocks.”

While the Nasdaq’s valuation has climbed, it remains well below levels seen during the dot-com bubble more than two decades ago.

The index currently trades at about 36 times earnings, a three-year high and well above the long-term average of 27 times, according to LSEG Datastream. That’s still well below the roughly 70 times the index reached in March 2000, providing some comfort to investors comparing the two periods.

“The Nasdaq’s latest rally pales in comparison to its experience in the late 1990s/early 2000s, with more gradual gains,” Jessica Rabe, co-founder of DataTrek Research, said in a note Wednesday. , so it doesn’t look unsustainable yet.”

Mega-cap stocks increasingly dominate the index. The top ten companies by market capitalization account for 59% of the Nasdaq, compared with 45% in 2020. The three companies with the largest weights are Apple, Microsoft and Nvidia, accounting for 11.7%, 10.6% and 10.3% of the index respectively.

While soaring stock prices have boosted the Nasdaq, the high concentration could cause problems for investors if big tech companies fall out of favor. For example, during the 2022 sell-off, shares of heavyweights Meta and Tesla fell 64% and 65%, respectively, that year.

The Nasdaq has outperformed other major U.S. stock indexes this year, driven by sharp gains in heavyweights such as Nvidia, Amazon and Meta Platform. By 2024, the tech index will rise 33%, while the S&P 500 will gain more than 27% and the Dow Jones Industrial Average will gain 17%.

Over the past decade, the Nasdaq is up more than 320%, while the S&P 500 is up 200% and the Dow is up 150%.

(Reporting by Saqib Iqbal Ahmed, Suzanne McGee and Lewis Krauskopf; Editing by Ira Iosebashvili and Rod Nickel)