With the Nasdaq at record highs, can tech stocks reboot the US economy?

Author: Forex Live | Category: Education

A closer look at the surge in tech stocks

With the Nasdaq at record highs, can tech stocks reboot the US economy? The Nasdaq 100 is a market capitalization system featuring 100 of the largest publicly-traded non-financial companies of the 3300 on the Nasdaq composite index. Since its inception in 1985, the makeup of the Nasdaq 100 has been determined by a weighted market capitalisation system. 

It is made up of companies across sectors from tech to retail to healthcare, but not financial businesses like commercial and investment banks. As the best-known tech index in the world, the Nasdaq 100 offers exposure to large price fluctuations as it has consistently displayed high volatility compared to other indices.

It offers strong liquidity, tight spreads, long trading hours, and is tracked by the ETF PowerShares QQQ Trust (QQQ). Another dotcom bubble? Or is the rally here to stay? Despite the Coronavirus pandemic causing the biggest shock to the US economy since World War II, the Nasdaq has recovered since March's huge sell-off and it spent early July setting record highs. 

Not surprisingly, many market players have sat on their hands throughout the rally, waiting for the index to peak-but they've been kept waiting. Instead, the index caught up all this year's losses and by June it had matched it February peak of 9817, boosted by gains by firms like Amazon, Netflix and Microsoft.

The consensus is that tech companies like these have had a 'good' pandemic: but how much gas does this rally have left in the tank? A look back at the Nasdaq 100 over the last decade shows that V-shaped recovery patterns are rarely followed by sustained uptrends. 

Bull traps have set into motion after nearly every dip in this period, punishing trend-followers who missed the upside during the initial ascent. Many skilled traders are well aware of these precedents and could sell aggressively when the instrument attempts to push even higher.

The Nasdaq 100 has so far completed a V-shaped rally above its previous February peak and then successfully broke out to reach new highs, but market history would tell traders to remain skeptical on the upside.

Could this be another bubble on the model of the mania that led to the disastrous dotcom crash in the early 2000s? Or are the sky-high valuations of the index's largest constituents justified? Analysts at Goldman Sachs have concluded that the Nasdaq 100 will continue to outperform the wider market, having returned 32% over the last 12 months against the 19% yielded by the S&P 500. 

However, the same analysts were careful to stress that higher share prices but steady company earnings lead to lower price/earnings ratio, making the stocks less attractive as long-term investments. The earnings of the companies on the index, then, are key. What affects the value of the Nasdaq 100? Before we move on, let's take a brief look at how these numbers are arrived at.

Factors such as earnings reports, key appointments and new product launches can all impact a stock's performance and price, which in turn affects the value of the wider index it is part of. 

The Nasdaq 100's weighting system means that events affecting the largest constituents are more likely to impact the price of the wider index. Also, broader economic factors such as interest rates, monetary policy and general economic indicators can have some effect on the index. 

The impact of US policy is significant as most companies on the index are based there. Finally, as with all stocks, the wider economic conditions have a big impact as they largely determine consumer appetite for spending or saving. And it just so happens that 2020 has seen one of the most radical and sudden shifts in consumer behavior on record.

How have the FAANGs performed during the Covid crisis? The FAANGM stocks - Facebook, Amazon, Apple, Netflix, Alphabet (Google's parent company) and Microsoft -are all key companies on the Nasdaq 100, given their gigantic size.

All have gained in value during the Coronavirus pandemic, with Netflix this year up 33%, Amazon 26% and Microsoft 15%. Apple, meanwhile, has gained 2%, Facebook 1% and Alphabet is 0.1%. Many people have been working from home, communicating via social media and shopping online, boosting demand for the products and services provided by these companies. 

Amazon in particular has enjoyed a sales boom, with revenues up 26% to $75bn in the first quarter of 2020: equivalent to more than $33m an hour. Netflix, meanwhile, now seems to have a decisive answer to critics of its enormous appetite for debt in recent years - but has the pandemic merely postponed questions over how sustained the streaming giant's revenue growth is?

Finally, Apple, which accounts for a whopping 12% of the Nasdaq 100, is expected to enjoy another stellar year, driven by the launch of new products and growth in service revenues. The nature of the Covid crisis has made the market lean heavily on technological solutions to everyday activities, with the prospect of an increasingly digital marketplace and workplace driving optimism for those tech stocks within the Nasdaq index. 

The Nasdaq can be traded through futures, spot prices, and exchange-traded funds (ETFs). Equiti also offers technical guidance on how to trade the Nasdaq, with in-depth analysis of strategies, expert tips and full training programmes.

This article was submitted by Equiti.

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