Athira Sethu
Kochi, 12 December 2024
Tech-heavy Nasdaq Composite Index has broken above 20,000 for the first time ever on Wednesday. The recent surge is partly due to anxiety about artificial intelligence and anticipation of soon-falling interest rates. Consequently, tech stocks such as Apple, Nvidia, Alphabet (Google’s parent company), and Tesla surged considerably, with the Nasdaq more than 33% up this year. The rally gained steam after a recent U.S. inflation report suggested the Federal Reserve might cut interest rates next week.
Despite the strong performance, there are concerns regarding rising stock valuations and the growing dominance of big tech companies in the index. The top 10 companies include Apple, Microsoft, and Nvidia, which now make up nearly 60% of the Nasdaq, up from 45% in 2020. While these companies’ rising stock prices have boosted the index, their dominance could be a problem if investors lose interest in big tech.
The Nasdaq has been doing quite well lately, especially considering it fell by 33% in 2022, as high inflation and rising interest rates took a toll on the index. However, the index has rallied almost 90% since then, buoyed by AI excitement. Take the case of Nvidia; its stock has risen more than 1,100% since October 2022.
However, some analysts say that high valuations of tech stocks could prove problematic in the future. The Nasdaq currently trades at 36 times its earnings, which is higher than its long-term average of 27 but much lower than the extreme levels reached during the dot-com bubble of the late 1990s.
The rally in 2024 has outpaced other major U.S. stock indexes. While the S&P 500 has risen by 27% and the Dow Jones by 17%, the Nasdaq has gained 33%. Over the past decade, the Nasdaq has grown by more than 320%, far outpacing the S&P 500’s 200% increase and the Dow’s 150% rise.
Although the Nasdaq has grown quite impressively, investors are now closely watching for signs that this tech-driven rally can continue or if it might face challenges from rising valuations and heavy concentration in a few large companies.
