Investors ponder Nasdaq’s latest ride to record high
Tech stocks lead way as index rises for 9th consecutive session
If streaks are meant to be broken, then tech stock investors should be on guard.
Surging technology stocks have powered the Nasdaq composite to nine consecutive sessions of gains, its longest winning streak since a 10-day run that ended Feb. 24, 2015.
The gains in the rally total nearly 5%, which leaves the Nasdaq up 18.6% for the year and at a record high. The Nasdaq has enjoyed nine-day stretches of wins five other times in the past 20 years and had a run of 17 up days in 1985, according to Bespoke Investment Group.
Nasdaq stocks have become the investment of choice on Wall Street. Investors continue to flock to popular and dominant companies such as Facebook, Amazon, Apple, Netflix and Google parent Alphabet — the socalled “FAANG” stocks — whose shares keep rising in value. Facebook and Netflix are both up more than 40% this year.
The big run-up raises questions: Can tech stocks keep rising? Will Main Street investors risk getting swept up in the euphoria and go on a tech stock buying binge when prices are at their highest and are vulnerable if bad news hits? In a sign of the Wall Street herd mentality gaining momentum, investing in the Nasdaq is now the most “crowded trade” — Wall Street-speak for pretty much everyone piling into the same investment at the same time — according to a survey of global fund managers released Wednesday by Bank of America Merrill Lynch. Popularity isn’t necessarily a bad thing for stocks, but there’s often risk when investors are all betting on the same investment going higher; if the trend reverses, these “momentum” stocks can quickly lose altitude, says Mark Luschini, chief investment strategist at Janney Montgomery Scott.
“These have become momentum trades and the shakeouts in the past 30 days are indicative of the potential for further volatility and declines” in these hot stocks, Luschini says. The shakeouts he’s referring to are a few days in June when the Nasdaq suffered a number of sizable sell-offs, including a 1.8% drop on June 9 and losses of 1.6% and 1.4% later in the month.
But not everyone on Wall Street thinks today’s tech titans will suffer the fate unproven tech stocks did in 2000, when the dotcom bubble burst because of massive overvaluation. The current crop of tech companies driving the Nasdaq are benefiting from strong earnings growth, huge market share in their respective areas and far lower valuations.
The average Nasdaq stock traded at a price-to-earnings ratio of 107 in 2000, vs. a P/E of roughly 23 today, according to LPL Financial.
“The 2000 tech rally was based on fumes,” says Peter Cardillo, chief market strategist at First Standard Financial.
For example, Netflix, the video-streaming service that is benefiting from original programming and a global user push, saw its shares jump more than 13% Tuesday after it topped revenue projections the day before and reported far more new subscribers than expected. Similarly, in their most recent quarterly reports, Apple posted profit of $11 billion, and Facebook earned $3.1 billion. Tech earnings for the most recent quarter will be released soon.
The strong earnings is one reason the tech sector in the S&P 500 stock index on Wednesday surpassed its record level set in March 2000, according to S&P Dow Jones Indices.
The robust competitive position of many leading tech firms could keep their stocks buoyant for longer than expected, adds Thorne Perkin, president of Pa- pamarkou Wellner Asset Management. “So-called crowded trades (like tech is now) can also work, and they can work very well for a long time,” Perkin says.
Tech stocks are also benefiting from a weak dollar, which makes their gadgets and services cheaper to buy overseas, where they get roughly 56% of their revenues and economies are getting stronger, according to Joe Quinlan, a strategist at U.S. Trust.
So what could derail the tech rally? Any broad decline in the U.S. stock market caused by a weakening in economic activity, Cardillo says. Other market analysts say tech could suffer if the Federal Reserve hikes interest rates too aggressively and slows down the U.S. economy too much.
The stocks also will go down when investors think they have squeezed out all the gains they can. “While a 5% to 8% drop would not surprise us,” Perkin says, “we don’t see this as a bubble ready to burst.”