It’s been a strange year for the economy, but an even stranger year for NASDAQ. | Source: David Tran Photo/Shutterstock.com
- The NASDAQ is up 15% for the year despite harrowing economic data.
- There are some signs that tech stocks could be in another bubble.
- But it’s also not hard to see why markets think they’re invincible.
The NASDAQ Composite is up an incredible 15.73% for the last twelve months. Yes, these last twelve months. Imagine someone predicted all of this to you a year ago.
They said in one year unemployment will be 14.7% as 20 million Americans lose their jobs in one month. U.S. GDP will decline 34% in one quarter (Goldman Sach’s forecast for Q2.) The price of oil will be negative. The Federal Reserve will slash interest rates to zero.
And the NASDAQ will be up 15% for the year.
Would you have believed them? Does that make any sense at all? The disconnect between the worst macro-economic data in history and a soaring stock market is baffling to many. To others, it’s infuriating. It’s the most hated equities rally in history.
A Strange Year for the Stock Market
It’s been a strange year for the stock market. | Source: REUTERS/Brendan McDermid
But it is what’s happening in the stock market today, in one of the strangest years in history. The NASDAQ Composite opened trading on May 10, 2019 at the 7,881.31 level. It closed on Friday, May 8 this year at 9,121.32.
In comparison, the Dow Jones Industrial Average opened May 10, 2019 at the 25,763.72 level. It closed last week at 24,331.32, down 5.55% for the year. The S&P 500 Index opened May 10, 2019 at 2,863.10, and finished last week at 2,929.80, for a 2.32% gain over the last year.
So the broader stock market’s 12-month gains are in line with how it performs during multi-year bull markets. But the old school, blue-chip Dow 30 companies are struggling to pick up market value in this brave new world.
Meanwhile, the tech-heavy NASDAQ Composite, which took years to recover from the early rush of over-investment that led to the Dot Com bubble, is blowing up in the year of coronavirus. Is it another bubble, or are tech stocks invincible?
Signs of Another NASDAQ Bubble
Tech stocks may be in another, very counter-intuitive bubble. One sign of that would be the domination of 5 mega-cap stocks in both the NASDAQ and S&P 500. Going into May, the six FAANGM stocks made up a staggering 25% of the S&P 500’s $21.4 trillion market cap.
The market had a similar top-heavy concentration during the Dot Com bubble.
That lopsided allocation posed a significant risk to investors in 2000. And the chickens came home to roost when the bubble burst, economic growth went for a dive, and equities went risk-off. As the economy contracts this year, Facebook and Alphabet are expected to lose some $44 billion in ad revenue. Amazon’s earnings per share fell in the first quarter fell year over year, and even missed expectations.
Tech Stocks Might Just Be Invincible
But there are also signs that the NASDAQ’s incredible performance this past year proves that the tech industry might be an indestructible profit-raking engine. While an economic contraction hits everyone, the tech business has unique characteristics that grant it some immunity to the worst challenges of even a global virus pandemic.
The software business is incredibly versatile. Unlike brick and mortar retail, or industrial manufacturing, tech businesses can be operated by workers using their computers from home. And the products of many NASDAQ 100 companies can be purchased from home, and delivered over the internet. The coronavirus lockdowns gave us a revealing glimpse scope and value of the digital economy.
Alphabet (NASDAQ:GOOGL) doesn’t depend on supply lines from China to deliver Google search to customers and deploy ads. Neither does Microsoft (NASDAQ:MSFT) or Adobe (NASDAQ:ADBE) to fulfil orders for Xbox 360 games or Photoshop downloads. PayPal (NASDAQ:PYPL) and Intuit (NASDAQ:INTU) also conduct commerce seamlessly in the invisible ether of the digital plane.
Even Apple (NASDAQ:AAPL), which is best known for its hardware products and their integrated operating systems, saw its earnings per share increase in quarter one.
Even before the crisis, the NASDAQ 100’s aggregate P/E ratio stood at hardly a premium to the broader S&P 500 Index last December. That’s especially true taking into account the tech industry’s earnings growth momentum. Maybe we’re looking at a bubble, but it’s not hard to see why markets think tech stocks are invincible.
Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com. The above should not be considered investment advice from CCN.com. The author holds no investment position in U.S equities at the time of writing.
This article was edited by Aaron Weaver.
Last modified: May 10, 2020 6:28 PM UTC