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The Nasdaq Composite Index has soared to its highest levels of 2023, marking a significant milestone in the resurgence of Wall Street and reflecting an environment of considerable investor optimism. The tech-heavy Nasdaq hit a 14-month high, largely driven by massive gains from several of the tech index's largest companies.
Overall, Invesco QQQ Trust (QQQ - Free Report) and Fidelity Nasdaq Composite Index ETF (ONEQ - Free Report) have added about 37.8% and 30.9%, respectively. Notably, last year, the Nasdaq experienced a steep 40% loss as investors abandoned rate-sensitive tech stocks in the wake of the Fed hiking interest rates to their highest level since the mid-2000s.
Inside Nasdaq’s AI-Led Jump in 2023
Mega-cap companies, notably those creating a significant buzz in the AI sector, have been the key drivers of the Nasdaq’s recovery. This growth has been spurred, in part, by the release of Microsoft's ChatGPT AI chatbot and a subsequent spike in investments in generative AI developments and the hardware powering such technology.
Chipmakers Nvidia and AMD, as well as generative AI leaders Alphabet and Microsoft, have each seen their stock prices surge more than 40% since the start of the year. This has helped the Nasdaq to significantly outpace the S&P 500 and the Dow Jones Industrial Average this year.
Can the Index Continue Its Run?
As we stand in the middle of 2023, the question on everyone's mind is: Can the NASDAQ continue its skyward journey?
As of mid-2023, the NASDAQ has been trading at high valuation levels by historical standards. Nasdaq PE ratio as of June 13, 2023 is 22.20X. Historical evidence suggests that, despite seemingly high levels, there may still be room for growth. In 2010, Nasdaq’s P/E hit a low of 7.64X. This raises questions about whether the current rally is sustainable. But then, the current P/E is not even near close to the historically high level. The past decade’s historical data reveal that the highest P/E was 49.57X in 2017.
Moreover, while high valuation levels may indicate a potential correction, they do not necessarily predict a downturn. The tech sector, which forms a large part of the NASDAQ, is known for its high-growth potential, which can justify higher-than-average valuation ratios.
Fundamentals Are Strong
It's important to note that valuation is not the only factor that drives market movements. Other factors, such as interest rates, inflation, geopolitical events, and technological advancements, can also play a significant role. And here’s where the Nasdaq is likely to win.
Inflation has been exhibiting a declining trend, with the May consumer data for the United States coming in at a two-year low. This would, no doubt, give the Fed a reason to opt for a less-hawkish/dovish policies in the coming days. Already the Fed paused on its rate hike momentum in June. Such Fed moves will result in lower rates, which is a boon for high-growth sectors like technology.
As far as technological advancements are concerned, the Nasdaq is awaiting even rosier days thanks to the growing adoption and the ongoing emergence of AI, machine learning and IoT. Moreover, U.S. recession fears are also easing with steady output and consumer spending.
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Can Nasdaq ETFs Soar From Its 2023 Peak?
The Nasdaq Composite Index has soared to its highest levels of 2023, marking a significant milestone in the resurgence of Wall Street and reflecting an environment of considerable investor optimism. The tech-heavy Nasdaq hit a 14-month high, largely driven by massive gains from several of the tech index's largest companies.
Overall, Invesco QQQ Trust (QQQ - Free Report) and Fidelity Nasdaq Composite Index ETF (ONEQ - Free Report) have added about 37.8% and 30.9%, respectively. Notably, last year, the Nasdaq experienced a steep 40% loss as investors abandoned rate-sensitive tech stocks in the wake of the Fed hiking interest rates to their highest level since the mid-2000s.
Inside Nasdaq’s AI-Led Jump in 2023
Mega-cap companies, notably those creating a significant buzz in the AI sector, have been the key drivers of the Nasdaq’s recovery. This growth has been spurred, in part, by the release of Microsoft's ChatGPT AI chatbot and a subsequent spike in investments in generative AI developments and the hardware powering such technology.
Chipmakers Nvidia and AMD, as well as generative AI leaders Alphabet and Microsoft, have each seen their stock prices surge more than 40% since the start of the year. This has helped the Nasdaq to significantly outpace the S&P 500 and the Dow Jones Industrial Average this year.
Can the Index Continue Its Run?
As we stand in the middle of 2023, the question on everyone's mind is: Can the NASDAQ continue its skyward journey?
As of mid-2023, the NASDAQ has been trading at high valuation levels by historical standards. Nasdaq PE ratio as of June 13, 2023 is 22.20X. Historical evidence suggests that, despite seemingly high levels, there may still be room for growth. In 2010, Nasdaq’s P/E hit a low of 7.64X. This raises questions about whether the current rally is sustainable. But then, the current P/E is not even near close to the historically high level. The past decade’s historical data reveal that the highest P/E was 49.57X in 2017.
Moreover, while high valuation levels may indicate a potential correction, they do not necessarily predict a downturn. The tech sector, which forms a large part of the NASDAQ, is known for its high-growth potential, which can justify higher-than-average valuation ratios.
Fundamentals Are Strong
It's important to note that valuation is not the only factor that drives market movements. Other factors, such as interest rates, inflation, geopolitical events, and technological advancements, can also play a significant role. And here’s where the Nasdaq is likely to win.
Inflation has been exhibiting a declining trend, with the May consumer data for the United States coming in at a two-year low. This would, no doubt, give the Fed a reason to opt for a less-hawkish/dovish policies in the coming days. Already the Fed paused on its rate hike momentum in June. Such Fed moves will result in lower rates, which is a boon for high-growth sectors like technology.
As far as technological advancements are concerned, the Nasdaq is awaiting even rosier days thanks to the growing adoption and the ongoing emergence of AI, machine learning and IoT. Moreover, U.S. recession fears are also easing with steady output and consumer spending.