The Nasdaq Composite Index soared past 20,000 for the first time ever on Wednesday, marking a significant milestone in a year dominated by the fervor for artificial intelligence and the anticipation of falling interest rates, which together spurred a dramatic rally in technology stocks.
The tech-centric index has leaped over 33% this year, propelled by a cadre of mega-cap tech companies including Apple, Nvidia, Google-parent Alphabet, and more recently, Tesla. The surge was further bolstered by a U.S. inflation report that solidified expectations of a Federal Reserve rate cut in the coming week. The index concluded the day at 20,034.89, up by 1.8%.
While this rally has been a boon for investors focusing on growth and technology, there’s growing concern about the high valuations and the increasing dominance of these megacap companies within the index.
Cameron Dawson, chief investment officer at NewEdge Wealth, commented, “There is clearly an aspect of a chase into year-end, where the winners … keep winning. The question is if this momentum can persist into 2025, where stretched valuations, positioning, sentiment, and growth expectations could all present high bars to jump over to keep above-average returns going.”
The Nasdaq had a tumultuous journey in recent years. After a drastic drop in early 2020 due to the global economic standstill caused by the pandemic, the index rebounded robustly, aided by near-zero interest rates and substantial fiscal stimulus from the U.S. government.
However, 2022 saw a significant decline, with the index losing 33% as inflation hit 40-year highs, prompting the Fed to implement multiple rate hikes. Contrary to expectations, no recession ensued, and the index has since rebounded by about 90%, fueled by optimism around AI’s business potential.
Nvidia, a leader in AI hardware, has seen its stock value increase by over 1,100% from its October 2022 low. Alex Morris, chief investment officer of F/m Investments, noted, “The AI story still rings true and appeals to investors. These are the go-go stocks.”