The recent rebound in technology stocks has been impressive, with the Nasdaq 100 index climbing nearly 5% from its recent low. This surge has not only caught the attention of investors but also raised hopes of reaching record levels. However, for this milestone to be achieved, new catalysts are needed.
One factor driving this rebound is the increasing adoption of artificial intelligence (AI) and its positive impact on companies like Nvidia, Microsoft, and Alphabet. Investors see the potential for substantial earnings growth in these technological advancements and have seized the opportunity to invest before missing out.
Another crucial aspect contributing to the recent bounce is the decline in the yield on 10-year Treasury debt. From its peak earlier this summer, the yield has dropped to just above 4.1%. This decrease in bond yields makes future profits more valuable in present terms. Consequently, investors are enticed by the long-term earning potential of tech stocks.
However, there may be a hurdle in the path to further gains. The decreasing yields no longer seem to be as influential as before. Despite a slight dip in the 10-year yield, the Nasdaq 100, currently hovering around 15360 as of Wednesday’s open, experienced a minor 0.2% decline.
It remains to be seen if additional factors will emerge to propel technology stocks to new record levels. In the meantime, investors eagerly await any developments that can sustain this impressive rebound.
Nasdaq 100 Valuations and Tech Stocks
Valuations of the Nasdaq 100, a reflection of how much investors are willing to pay for each dollar of future earnings, have been on the rise. Currently, the Nasdaq 100 is trading at approximately 24.6 times the aggregate earnings expected from its component companies over the next 12 months. This is compared to just over 20 times in October 2022 when the 10-year yield was last above 4%. However, achieving even higher valuations would likely require a more significant decrease in the 10-year yield.
As a result of these high valuations, tech stocks have not yet surpassed key levels. The Nasdaq 100 remains below the area near 15750, which it reached before sellers pushed it lower in July. This level is familiar, as the index was unable to surpass just over 15600 points in January of 2022 after experiencing a decline from its record high of 16573 in late 2021.
To drive tech stocks higher, continued fast growth in profits may be necessary since price/earnings multiples are not expected to rise significantly. Analysts predict that aggregate EPS for the Invesco QQQ Trust Series 1 exchange-traded fund (QQQ), which tracks the Nasdaq 100 index, will grow by approximately 18% to $16.17 in 2024, according to FactSet. If the third and fourth quarters support this forecast, there is a possibility that the Nasdaq 100 could reach a new high by the end of this year, assuming it maintains its current multiple of expected earnings.
However, achieving this level may require waiting a few more months as second-quarter earnings reports have concluded.
Tech Stocks Require More Than Momentum
It’s no longer enough for tech stocks to rely solely on momentum to reach new heights. In order to continue their upward trajectory, they now require either lower bond yields or profit growth aligned with market expectations.
It’s crucial for tech investors to recognize this shift and carefully consider their investment strategies moving forward. The days of assured returns based solely on momentum are behind us. Instead, a more calculated approach is needed to navigate the ever-evolving landscape of the tech industry.
In conclusion, the key to unlocking the full potential of tech stocks lies in finding the right balance between sustainable profit growth and favorable market conditions. By staying vigilant and adapting to the changing demands of the market, investors can seize new opportunities and thrive in this dynamic industry.