The NASDAQ index closed at 13787 heading into the start of July but what has been driving this increase and where is it going from here?
The last all-time high was recorded in November 2021 which was 16212. At present we remain 2425 below this high which is approximately a 17.5% gain required in the index to climb back at these levels. Let’s take a look at what has been driving the recent market rally.
The NASDAQ index is primarily composed of the best technology names on the planet. The top 10 weighed companies of the index result in nearly 60% of the value increase or decline in the index. Microsoft and Apple are the top 2 companies who share a combined weighting of 25.366%. When these two companies continue performing it is a huge boost to the overall index values. With Apple reaching a new all-time high today and Microsoft only 3.2% below its all-time high, it is easy to see why the index has performed well lately. In fact Microsoft came off a low in November 2022 of $213.43 and has since rallied 59.55% to close at $340.54. Apple bounced off a similar low in January 2023 of $124.17 and has rallied 56.21% to close at $193.97. Both companies have a massive market capitalization worth more than 2.5 trillion. Apple continues to be the worlds most valuable company with a market cap recently surpassing 3 trillion.
While both remain excellent companies and deserve to have to have a large weighting within the NASDAQ index, it is difficult to see either company contributing to similar gains in the index over the next 6-18 months. Both companies trade at a high Price to Earnings between 30-35. Apple in particular isn’t expected to have the same growth rate over the next 4 years as it achieved in the previous 4 years. This will result in single digit earnings per share and revenue increases on average over the next 4 years. Microsoft on the other hand is expected to grow double digit earnings and revenue which may continue to excite investors.
Looking at other notable index participants supporting market rallies are names such as Amazon, NVIDIA, Meta, Tesla and Alphabet. Together these companies combine for an additional weighting of 29.682% in the NASDAQ. Should the NASDAQ continue to rally these names will likely need to lead growth. There are notable concerns within this group that may provide limited upside potential. In particular valuation metrics are inflated with some names sporting larger earnings per share and price to earnings ratios that are difficult to justify. Any earnings miss can result in steep valuation corrections. Competition from improving product lines of competitors can also affect demand and product pricing which hurt future growth prospects. Not to mention the CNN metric for the fear/greed index is currently sitting at 80 representing extreme greed.
While it is possible for the market to have a mind of its own and continue climbing higher, my prediction is we’re likely to see a correction of 10-15% in the NASDAQ index over the next 3-6 months. Reasons leading to this prediction include:
- Cooling down period due to high greed reading across the market
- 90% of the top 10 companies composing of the NASDAQ index have already rallied significantly
- Interest rates continue to rise due to inflation which will continue to put pressure on consumers and businesses
- Economic data won’t be as positive as interest rates continue rising
For these reasons I would stay clear of longing the NASDAQ index over the next 2 quarters and look at assessing the market at that time.