Nasdaq Composite trades over 10,000 for the first time ever, but the rally may be going ‘too far’
"We always overshoot a little too far, and then we have to correct," says one analyst.
There is no stopping this market.
Despite terrible economic data (including massive, yet improving, unemployment numbers) and some of the headiest valuations the market has seen, the tech-heavy Nasdaq Composite reached a new record on Tuesday by passing the vaunted 10,000-point mark briefly in intraday trading for the first time, before closing up 0.3% at 9,953.75. That means the index, dominated by tech names like Amazon and Facebook, now has recovered all its losses from the coronavirus recession, and has bounced back more than 45% off its March lows. The index is now up 9% for the year. On Monday, the Nasdaq surpassed its February 19 record of 9817.18 by closing at 9924.74.
Yet in light of the enormous run-up—not to mention the fact that the U.S. economy is officially in a recession—those like Randy Frederick, vice president of trading and derivatives at Charles Schwab, caution: “We’ve gone maybe just a little bit too far at this point.” Frederick tells Fortune he’s been calling this run-up a new bull market since it first rose 20% from lows. “Most people have been sending me nasty comments for the last four weeks on that, but now I think they’re all on board,” he says.
That said, now the danger is that things have gotten overheated.
“We always overshoot a little too far, and then we have to correct,” he says. “What concerns me is if we get too overheated, we set ourselves up for another pullback. In the last two weeks, we’ve just been going to the moon,” says Frederick. The broader market, however, still hasn’t surpassed old records yet: The S&P 500 still trades about 4.5% below its high in February.
The Nasdaq, meanwhile, has gotten the benefit of the rally in tech: Big names like Amazon, Alphabet, and Netflix have hit highs in recent weeks, up 36%, 37%, and 20% respectively from March 23, and are trading at eye-popping multiples. The S&P 500 is currently trading well over 20 times the next 12 months earnings, according to S&P Global data. So, why is the market roaring on, when equities come at these price tags?
Analysts say support from the Fed and unprecedented fiscal and monetary policy have given markets a safety net. “How can the market not be optimistic when there’s enormous amounts of liquidity out there?” asks Frederick. And while the economic data is still abysmal, it’s marginally improving.
Indeed, investors have grown broadly more optimistic about the economic recovery. “The risk-on trade really is gaining traction,” analysts at RBC Capital Markets wrote in a note. “Valuations have spiked to historical highs in many industrial sub-sectors, signaling a strong recovery is potentially taking hold.”
Tech on a tear
And when it comes to tech stocks, investors seem to have stopped caring about valuations altogether. Investors are “completely ignoring them. I don’t think valuations matter at all right now,” suggests Frederick. But investors are also hanging on to stocks that are seen as having huge catalysts for growth during the crisis and after (think Amazon Microsoft, and Apple). “In a market where there’s quite a bit of uncertainty, investors almost always, … are on the hunt for growth and certainty,” Wells Fargo Investment Institute’s senior global market strategist Sameer Samana told Fortune back in April. “That’s the magic combination.”
But even the optimists see reason for caution. With the tech-heavy index’s record Tuesday, Frederick notes “It’s really hard to see the Nasdaq at an all-time high now when the economy was significantly better in January, and yet the market is even higher now.” He adds: “That makes me a little bit uncomfortable.”
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