The Nasdaq Composite Index, which is tech-heavy in nature, is up 26.1% this year but slumped more than 5.9% in the past month, marking September as the
worst month for the index in 2023. The rising rate worries had led to this chaos. Notably, the 10-year Treasury yield hit a 15-year high this month.
Thanks to the sticky inflation, interest rates are likely to be higher for longer. Higher oil prices are likely to push up inflation in the medium term. This scenario and the resultant higher rates are not great for growth stocks like technology and some consumer discretionary companies.
What Lies Ahead?
The benchmark U.S. treasury yield increased to 4.59% on Sep 28, 2023 from 4.18% on Sep 1, 2023, having hit a high of 4.61% on Sep 27, 2023. If the Fed moves forward with the anticipated rate hike in November, it will mark the twelfth hike since the commencement of policy tightening in March 2022.
But we could see rate cuts in 2024. The Fed's dot plot projections revealed that two rate cuts are expected in 2024. This should favor the tech sector as well as Nasdaq investing (read:
High-Dividend ETFs: Winners Amid Fed's Higher-For-Longer Rate Cues).
No matter whether the Fed hikes, pauses or cuts rates, tech investing will likely be in fine fettle next year due to the artificial intelligence (AI) boom and the perception that the era of rock-bottom rates is over. Both tech and higher rates are the new normal, and investors are becoming accustomed to it. According to a recent note by Wedbush analyst Dan Ives, the technology sector is poised to weather a prolonged phase of increased interest rates, per a Business Insider article,
as quoted on Yahoo Finance.
Meta, Microsoft and Alphabet are all about AI. Agreed, the peak of the AI boom will take time to materialize, but the prospect is real. Microsoft CFO Amy Hood said on the company's earnings call, “the impact of [AI] will be weighted towards [the second half of the 2024 fiscal year]."
AI's potential has already boosted the earnings outlook for leading tech firms such as Nvidia, Microsoft and Adobe. Wedbush analyst Dan Ives also mentioned that preliminary assessments of corporate IT expenditure show a moderate improvement, indicating a favorable trend for software, semiconductors and digital media equities.
Per Nvidia founder & CEO Jensen Huang, demand for its data center platform for AI is huge and broad-based. According to Huang's estimate, the value of data centers within cloud and enterprise software systems is around $1 trillion.
Valuation: Currently 18% Discount to All-Time High
In terms of valuation, the Nasdaq Composite is not highly overvalued at present. In fact, the index is still 18.6% below its closing level in 2021. The index witnessed havoc loss in 2022 and thus is still not overvalued despite a 31.7% rally in 1H. The Nasdaq Composite reached its all-time high of 16,212.23 on Nov 22, 2021.
Can the Index Regain its Strength?
As of mid-2023, the NASDAQ has been trading at high valuation levels by historical standards. Nasdaq’s PE ratio as of Sep 26, 2023 is 21.62X. Historical evidence suggests that, despite seemingly high levels, there may still be room for growth. In 2021, Nasdaq’s P/E touched a level of 29.41X. Moreover, the past decade’s historical data reveal that the highest P/E was way higher than 29.41X and was hit in the 2016-2017 period.
In a nutshell, the tech-heavy Nasdaq may rebound ahead thanks to peaking rates and the core strength of the technology sector. Hence, investors with a long-term perspective can bet on Nasdaq-oriented ETFs like
Invesco QQQ Trust Series I ( QQQ Quick Quote QQQ - Free Report) , Invesco NASDAQ 100 ETF ( QQQM Quick Quote QQQM - Free Report) , Fidelity Nasdaq Composite Index ETF ( ONEQ Quick Quote ONEQ - Free Report) and Invesco NASDAQ Next Gen 100 ETF ( QQQJ Quick Quote QQQJ - Free Report) .