Investors diving into Apple, Microsoft and Amazon help power Nasdaq past 7000
By Corrie Driebusch and Ben Eisen
This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (January 3, 2018).
The Nasdaq Composite closed above 7000 for the first time Tuesday after racing to a fresh 1,000-point milestone in just over eight months -- a pace not seen since the heights of the technology boom.
Many global stock indexes have hit records or multiyear highs in recent months, lifted by signs of a pickup in economic expansion around the world.
The Nasdaq has risen faster than other major U.S. indexes over the past year as investors, frustrated with low interest rates and tepid global growth, bet on the prospects of large technology companies such as Apple Inc., Google parent Alphabet Inc. and Microsoft Corp., all of which are heavily weighted in the index.
Those three companies, along with fellow heavyweights Amazon.com Inc. and Facebook Inc., collectively contributed more than two-thirds of the points that carried the Nasdaq from one 1000-point milestone to another, according to stock-market research firm Birinyi Associates.
Such bets helped the Nasdaq jump 28% in 2017, beating the Dow Jones Industrial Average's 25% gain and S&P 500's 19% rise. The only two times the Nasdaq has passed 1,000-point milestones faster were the 38 trading sessions the index took to advance to 4000 in 1999 and the 49 sessions it needed to top 5000 in 2000 -- shortly before the dot-com bust.
Investors and analysts say there are few signs of a stock bubble today, yet the rapid appreciation in everything from tech shares to industrial stocks to bitcoin recently has some concerned about whether the nearly nine-year bull market could be flirting with a peak.
On Tuesday, the Nasdaq rose 103.51 points, or 1.5%, to 7006.90. It has been 174 trading sessions since the index closed above 6000 for the first time.
Many investors and analysts have attributed much of stocks' recent climb to strong corporate earnings, a potential boost from tax cuts and signs of improving global growth, all of which help offset worries that the surge has stretched stock valuations unsustainably.
Earnings for technology companies have soared in 2017, but they have been unable to keep up with price gains. The Nasdaq Composite recently traded at roughly 28 times the past 12 months of earnings for companies in the index, the highest level since 2004, according to Thomson Reuters Datastream.
"Is it a bubble? No. Is it uncomfortably expensive? For me, it is," said David Rosenberg, chief economist and strategist at Gluskin Sheff + Associates Inc.
Of course, prices relative to earnings remain far more subdued than at the height of the dot-com boom, when many investors measured a company's value based on how many page views an internet company received in a given month instead of its earnings. Also the Nasdaq Composite is no longer as concentrated in technology companies. In 2000, nearly two-thirds of the market capitalization of the index was tech stocks, compared with 45% this month.
"We find that arguments about valuation being stretched certainly at the individual stock level are not true," said Jeffrey Krumpelman, chief investment officer at RiverPoint Capital Management, which is overweight tech stocks like Alphabet, Facebook Inc., and Broadcom Ltd. He believes the increasing profitability of tech stocks means they will continue to rise, at a pace "greater than the market."
The tech industry and its importance in the wider economy have changed dramatically since the last boom. In the late 1990s, investors were largely betting on the promise of the internet. Today, with the decade-old smartphone boom and advances in areas like cloud computing and artificial intelligence, technology is deeply embedded into the way people work and do business, and has transformed industries including retail and entertainment.
That is reflected in the list of the most dominant companies. The five biggest Nasdaq companies by market value in 2000 -- Microsoft, Cisco Systems Inc., Intel Corp., Oracle Corp. and Sun Microsystems -- were focused heavily on building the internet or serving technology to businesses. Today Microsoft remains in the top-five group, but the other four -- Apple, Google, Amazon.com Inc. and Facebook Inc. -- are ubiquitous consumer-focused businesses with enormous profits from selling products and digital advertising.
Much of the speculation for new technologies remains in the private market. In 1999, nearly 550 companies completed initial public offerings in the U.S., and about 375 of those being internet or tech companies. In 2017, there were 189 U.S.-listed IPOs, 37 of which were by tech or internet companies, according to Dealogic. Many of the fastest-growing tech companies are steering clear of public listings in favor of raising money from venture capital funds that are flush with cash.
Still, individual investors' enthusiasm for stocks is on the rise, a trend that worries some money managers.
Expectations that stock prices will rise over the next six months jumped to 53% for the week ended Dec. 27, above their historical average of 39%, according to the AAII Sentiment Survey. It is a level not seen in more than three years. Bank of America Merrill Lynch's equity strategists said that investor mood tends to drive returns in the later stages of the bull market. They warned earlier in December that "2018 could be the year that investors max out."
"Usually the best time to buy equities is when everyone is depressed and people are hiding under the table," said Mr. Rosenberg of Gluskin Sheff, noting that this was the case in the spring of 2009. Today, market-sentiment readings are near record highs and stock portfolio managers are holding less cash than typical.
A milestone such as the Nasdaq crossing 7000 "will be a real test of investor resolve," he said. "This is probably one of those times to become a little cautious."
Write to Corrie Driebusch at [email protected] and Ben Eisen at [email protected]