Many of these stocks are viewed as insulated from the swift changes in global consumer and corporate behavior caused by the COVID-19 pandemic, resulting in valuations that may have increased ahead of fundamentals. For example, the NASDAQ’s price/equity ratio moved approximately 25% higher while free cash flow yield fell roughly 16% from year-end 2019 to July 2020. Multiple expansion, particularly in the year-to-date period, has been a meaningful driver of higher valuations and relative returns. This was true across a variety of metrics, including P/E, P/S, P/CF, and FCF Yield. market and historical averages, they are not comparable to valuations that led to the sharp sell-off in the aftermath of the dot-com boom. While the valuations of the NASDAQ stocks are currently elevated relative to both the broad U.S. The NASDAQ’s performance during the dot-com bubble was driven by a wider group of constituents. These six stocks also accounted for the majority of the NASDAQ’s performance in recent years and more than 100% of its performance for the trailing 10 years. As of July 31, 2020, the FAANGM constituents-Facebook, Apple, Amazon, Netflix, Google/Alphabet, and Microsoft-made up almost half (49%) of the Index. However, a notable difference is the concentration of the Index and of performance. Internet-related consumer discretionary stocks accounted for another 13% weight. As of July 31, 2020, IT was the largest sector in the NASDAQ (47%), followed by communications services (20%). While it outperformed the S&P 500 since the start of the global financial crisis in 2007, it took the Index until August 2016 to reach the March 2000 highs again.Īs was the case in 2000, the Index is currently dominated by IT and IT-related stocks. The NASDAQ continued to lag the S&P 500 through 2006. Second-tier NASDAQ stocks fared significantly worse many were delisted or acquired at large discounts to their peak values. While the top Index holdings sold off sharply during the dot-com bust, most survived the downturn yet took more than a decade to regain their market valuations. The drawdown from March 2000 highs took roughly 18 months, with the Index bottoming out in October 2002 with a decline of roughly 83%. However, of the top 10 holdings in March 2000, only Microsoft remained in the top 10 as of July 2020. The larger Index components in both 20 were companies with defensible business models. In recent years, the NASDAQ has been driven by a narrow group of stocks, which have also contributed to divergence between large cap growth and value indices. The NASDAQ also significantly outperformed the S&P 500 during the 1990s, culminating in a March 2000 peak. The NASDAQ’s recent outperformance has led market observers to draw parallels to the dot-com boom. Year-to-date through July 31, 2020, the NASDAQ outpaced the S&P 500 by roughly 2,300 bps, helping propel the NASDAQ’s strong performance over the past decade. While the Index briefly entered a bear market in March, it regained its losses by early June and continued its upward climb. The NASDAQ 100 Index reached all-time highs this week. Market Perspectives NASDAQ: A Historical Perspective
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