The Nasdaq 100 has recently been buoyed to record highs, propelled by a combination of strong business fundamentals and a rally in tech stocks during the pandemic. However, signs of a possible pullback may be looming, with some investors fearing that the stock market’s recent success is unsustainable.
The Nasdaq 100 is an index comprising the 100 largest publicly-traded companies listed on the Nasdaq Stock Exchange. It is well known for its outperformance of the S&P 500, but the technology-heavy index has been the primary driver of the stock market’s recent rally.
Recent analysis of the Nasdaq 100 suggests that a pullback is imminent. Some of the most prominent names in tech—Apple, Microsoft, Amazon, Alphabet, and Tesla—account for around 50% of the index’s value. This is an unusually high level of concentration, which exposes the index to significant risks.
Additionally, the Nasdaq 100 currently trades at the lofty price-to-earnings (P/E) ratio of 40 – the highest in history. This gap between stock prices and profits is widely seen as unsustainable, as it indicates that investors are expecting high future growth, which may not manifest as anticipated.
Furthermore, the Nasdaq is currently trading at a level that is almost 20% over its 200-day moving average. Historically, corrections occur when the index has broken 20% away from that average. This suggests that a pullback in the near future is likely.
In conclusion, a pullback in the Nasdaq 100 is becoming increasingly likely. Investors should exercise caution and be aware that a correction is on the horizon. As with any market, there will be winners and losers, so it pays to be informed and choose stocks carefully.