On Wednesday (11 December), the Nasdaq index closed above 20,000 points for the first time ever. Of course, investors will likely be aware that US stocks have done much better than on this side of the pond in 2024.
Yet it’s interesting to note that thanks to the gains from yesterday, the index is close to being up 100% in two years. That’s some insane growth and I’m keen to dig deeper to see if the party can keep going.
Putting the jigsaw together
First let’s drill down into the numbers. On 28 December 2022, the index closed at 10,213 points. At the moment, it’s at 20,034 points. Yesterday, it gained 347 points, so if it was to replicate that again today, it would be up almost 100% since 2022.
To understand why this is so impressive, it’s key to understand the make up of the Nasdaq composite index. It’s an index that measures the performance of over 3,000 securities listed, with a heavy focus on technology shares. It has a market-cap weighting, meaning that larger companies have a larger impact on the movement of the index. It’s no real surprise that companies like Nvidia, Apple and Microsoft are some of the largest constituents.
From that understanding, I can piece together why the index has produced such large gains. Over the past two years, tech has been the standout sector in the market. The rise of artificial intelligence (AI) has been a key theme for 2024, alongside chipmaking and cloud computing. Vast investor money has poured into these stocks.
Direction from here
I think it’s only natural that at some point in the coming months there will be a likely correction in the Nasdaq. This is healthy and would see investors book some profits. The average price-to-earnings ratio for the index is 47.7. This is far above the benchmark figure of 10 that I use for a fair value. So the stretched value could see some investors a little spooked in the short term.
Yet after any potential pullback, I still see the long-term trend being higher for some key members, which should act to push the overall index up as well. For example, I hold shares in Tesla (NASDAQ:TSLA). The stock’s up 79% in the past year.
Despite the surge, I feel it has fundamental drivers that should help it grow in the next couple of years. This includes the benefits from the new US President, who’s likely to champion domestic firms like Tesla over international rivals. Plans on easing corporate red tape and deregulation should also help the business.
Add into the mix the fact that key progress is being made with autonomous driving and robotics at the firm. As Tesla keeps adapting to the future, I feel investors get more confident in buying more.
Of course, Tesla’s facing much greater competition in the electric vehicle (EV) space than ever before. This will make it harder to keep profit margins as high as they are going forward.
So although I would be cautious about buying Nasdaq index trackers right now, I do feel that any dip can be used to buy selective index members. For example, if Tesla shares moved lower, I’d look to buy more.
