As US markets wound down ahead of the 4 July Independence Day holiday, the Nasdaq Composite closed at a new all-time high. A record 18,188.30 level was hit as investors shrugged off meek economic data and fed the technology rally that has run all year.

It was the 17th time the index had broken records in 2024, according to Nasdaq itself. The Nasdaq 100 Index of the 100 largest companies, joined the rally, ending its pre-holiday session (3 July) at 20,186.63, also an all-time high. It means that this year, the Nasdaq 100 has broken the 17,000, 18,000, 19,000 and 20,000 ceilings for the first time ever.

During that pre-holiday session, a service sector activity reading had come in considerably weaker than expected and indicated economic contraction, according to the Institute for Supply Management. The numbers could have sent shivers through equity indexes, yet investors put any worries to one side, upping the hope ante that the Federal Reserve has seen sufficient evidence of economic tightening to begin cutting interest rates. Notably, the rate on the 10-year US treasury fell for a second day in a row on 3 July.

‘It’s still very much a tech story’ in stocks, said Paul Nolte, senior wealth advisor and market strategist for Murphy & Sylvest. ‘When you look at the broader market, you’re not seeing the participation you would like to see from a healthier market,’ he told Reuters.

There is plenty of evidence. About 40% of the Nasdaq 100 stocks have already chalked up double-digit gains this year, a mark of a good performance by historic standards, 21% are up more than 20%, while AI (artificial intelligence) chip darling Nvidia (NVDA:NASDAQ) and UK firm Arm Holdings’ (ARM:NASDAQ) have scorched 154% and 141% higher respectively.  

WINNERS AND LOSERS

But if there’s some irrational exuberance sweeping across Wall Street, it hasn’t trickled far downstream, with some surprising names listed among the Nasdaq 100 laggards. Tesla (TSLA:NASDAQ) for one.

‘Everybody hated Tesla three months ago. But now, they’re having their day in the sun,’ said Larry Tentarelli, chief technical strategist at the Blue Chip Daily Trend Report. Tesla’s rally sets ‘a bullish tone for the market overall’.

Wind back to the last week of June and Elon Musk’s electric vehicles (EVs) firm was one of the indexes worst performing stocks, down more than 26%. That its second-quarter deliveries beat has since triggered a recovery of all those losses and more, says something about where expectations had drifted.

Long-run Tesla backer Gary Black, who runs the US-based Future Fund, sees scope for Tesla to outstrip third-quarter deliveries estimates of 435,000, reversing the two-quarter downtrend, and he’s also been playing with some, albeit speculative Tesla assumptions around the launch of a $25,000 Tesla and fully automated driving technology. His conclusion; an expanded Tesla target market worth up to $5 trillion.

Then there’s Globalfoundries (GFS:NASDAQ) and Intel (INTC:NASDAQ), two chip plays that have stubbornly resisted market optimism, down 35% and 8% this year. We know Intel has found it a long-run challenge to break out of its PCs backyard, although it has carved out market share in the cloud computing server space, just not at the most exciting end, unlike Super Micro Computer (SMCI:NASDAQ), say, with its liquid-cooled super servers.

As for Globalfoundries, it remains one of the world’s largest contract chip manufacturers, and as designers like Nvidia, Advanced Micro Devices (AMD:NASDAQ) and others seek to de-risk production, it should be able to pick up more than a few crumbs off TSMC’s (TSM:NYSE) table.

Walgreens Boots Alliance (WBA:NASDAQ) is another name that deserves a mention. Not a tech business at all, but it is still stuck at the foot of the Nasdaq 100 loser board, collapsing 55% this year.

This is odd. In theory, retail pharmacy should be a super-resilient business so why has been such an abysmal performer whose stock has lost 80% of their value over five years? Successive changes at the top have simply failed to revive its fortunes, and having been a vaccine winner during the pandemic, it has struggled to replace Covid vaccines demand and lower spending on personal care and beauty products as consumers wrestle with cost-of-living pressures.

A decision to cut the dividend by 48% alongside first quarter numbers at the start of the year (4 January) to conserve cash did little for sentiment. On 27 June, the company cut its full year 2024 earnings guidance alongside downbeat third-quarter results in which new CEO Tim Wentworth warned of a ‘difficult operating environment, including persistent pressures on the US consumer and the impact of recent marketplace dynamics which have eroded pharmacy margins’. In yet another blow, Boots CEO Sebastian James is also quitting after Walgreens Boots Alliance shelved its plan to sell or float the robustly performing chain for the second time in two years.

IS THERE A BUBBLE?

To the bubble hunters, signs of excess aren’t hard to find. Nvidia’s surge comes after a near-240% 2023 rally, 17% of the best-performing S&P 500 companies can be classified as tech, emphasising a rally that seems driven by a narrow set of stocks.

The S&P 500 provides interesting data points given its membership are drawn from all walks of stock market life. The S&P Equal Weighted Index is up less than 4% in 2024 versus 17.4% for the weighted equivalent. Throw in the AI everything up trade, that cryptocurrencies have roared back, inflation monsters could be stirring again, and US consumers showing signs of exhaustion, there’s plenty for the Cassandra’s to decry.

If tech goes pop, where does that leave markets, globally? The S&P 500 Shiller CAPE (cyclically adjusted price to earnings) stands at 35 right now. It’s only been this high twice before, during the pandemic recovery rally in 2021, and in the teeth of the dot com bubble in 1999/2000.

Yet, talk of bubbles seem premature and there is a sense that even the fastest sprinting AI stock stories are backed by real earnings and cash flows that may be getting stronger. ‘I’ve seen a lot of technology hype in my 20-plus years,’ says Mike Seidenberg, who runs the Allianz Technology Trust (ATT), a popular technology specialist fund among UK retail investors.

He believes that AI is not hype, but a ‘secular’ theme capable of creating ‘budgetary dollars for the beneficiaries’, even if revenue and profits is likely to ‘zig and zag’ depending on the varied pace of implementation cycles. Jean Boivin, head of the BlackRock Investment Institute, agrees. ‘The AI rally is supported by earnings and has more room to run, in our view,’ he says. ‘We don’t see an AI bubble.’

CONTINUED RALLY AND RECOVERY?

No one knows if or for how long this year’s market rally will continue, but as early hints from the upcoming second-quarter earnings season begin to emerge, indications point to a robust performance for S&P 500 and many Nasdaq companies.

Projections data from Investing.com for the second quarter of 2024 suggest earnings increase of 8.6% compared to the same period in last year, with revenues also expected to rise by an average 4.7%. ‘This anticipated growth rate is the most significant since the 9.9% uptick observed in the first quarter of 2022’, the report says.

‘The positive revisions trend leading up to this earnings cycle has set the stage for what appears to be a period of continued corporate resilience and an improving financial outlook’, the report goes on. The forecast earnings growth for the S&P 500 not only reflects a solid recovery but also marks a potential shift in momentum for the market, one that may include stocks that have so far failed to benefit from the fair winds this year.

That would be encouraging. But more important for retail investors is to remember to invest across the cycle rather than trying to time the market, something most of us fail at most of the time.

Second-quarter earnings kick-off, as ever, with the banks on 12 July, when JPMorgan Chase (JPM:NYSE), Wells Fargo (WFC:NYSE), and Citigroup (C:NYSE) are scheduled to report. Big tech reports start the following week, with Nasdaq 100 mega caps including Microsoft (MSFT:NASDAQ), Alphabet (GOOG:NASDAQ), Amazon (AMZN:NASDAQ), Apple (AAPL:NASDAQ) and Tesla the week beginning 22 July. 

Disclaimer: The author of this article Steven Frazer has a holding in Allianz Technology Trust.

How to play catch-up candidates in the Nasdaq 100

Investors expecting gains from the Nasdaq 100 to be more broad-based in the future and looking to maintain exposure while not being too tied to a handful of stocks which have already enjoyed stonking gains could consider buying a vehicle which tracks an equal-weight version of the Nasdaq 100 index. As a reminder this means the movements of individual constituents are all equally weighted rather than those with the largest market caps having the biggest influence on the direction of the index. Exchange-traded fund Invesco Nasdaq 100 (EWQX) provides the ability to do this for an ongoing charge of 0.2%.

‹ Previous2024-07-11Next ›