Fifteen years ago in March 2000, the Nasdaq Composite Index topped the 5,000 mark for the first time. Fast forward 15 years, and the index has once again crossed that threshhold. But this time, fundamentals are much healthier and investors should not fear a repeat of the 2000-2002 experience. Why? Simply put, the index is much, much cheaper.
The first time the Nasdaq Composite hit 5,000, it didn't stay there very long. Keep in mind that just six months prior to reaching 5,000 on March 9, 2000, the index was below 3,000. It then experienced a meteoric 80-percent surge from early September 1999 to March 2000 to first eclipse the 5,000 mark. The tech, media, and telecoms bubble subsequently burst. The 2001 recession and equity bear market followed. This resulted in the Nasdaq collapsing by over 60 percent from its peak over the following year and by nearly 80 percent from its March 2000 peak at over 5,000 to its ultimate trough in late 2002 at 1,114.
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Using the Nasdaq 100 as a proxy (the Nasdaq Composite isn't really a tradable index), the Nasdaq trades at a reasonable valuation of 19.8 times its constituents' earnings over the past 12 months and 18.6 times consensus earnings estimates for the next 12 months. This compares favorably with valuations that were more than three times higher 15 years ago, or 72.9 times earnings over the previous 12 months and 61.5 times forward earnings. Said another way, the Nasdaq is now at the same price level as March 2000, but the index's aggregate earnings per share has more than tripled over that time frame from $65 to $208.
Looking across an array of valuation metrics, we see a similar story. On average, the Nasdaq now is trading more than 70 percent cheaper than its bubble phase 15 years ago. The Nasdaq's beta — or sensitivity to broad market moves — has declined by roughly 20 percent from 1.26 in March 2000 to 1.02 today.
Nasdaq companies now employ far more attractive strategies for returning capital to investors. The Nasdaq 100 may offer a dividend yield of just 1.2 percent, although remarkably that is similar to the yield on Spanish and Italian government bonds maturing in 10 years. But, more importantly, growth in dividends per share for Nasdaq companies has exploded by more than 1,300 percent over the past 15 years.
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While we do not have an explicit forecast or allocation target for the Nasdaq, technology stocks form roughly half of the index's market capitalization. Current valuations for large-cap technology stocks appear attractive relative to their solid earnings growth, an improving cyclical outlook with respect to enterprise spending, accelerating cash payouts to shareholders, and exposure to drivers of long-term growth.
In the short term, we expect rising demand for IT equipment to propel growth forward, supported by declining unemployment and rising utilization of existing capacity.
In the long term, we look to cloud computing and e-commerce, among others. As consumers of bricks and mortar retailers shift their shopping and spending online, opportunities abound for related technology companies. Long-term positive drivers of digital growth, including the rapid adoption of mobile devices, will hasten the retail market's shift online. Digital data also has the potential to profoundly transform economic structures, disrupt existing business models, and create substantial growth opportunities for those well positioned to participate.
Within the context of wider progress in the U.S. stock market, the tech industry, and the economy as a whole, Nasdaq 5,000 is just another number.
Commentary by Jeremy Zirin, chief U.S. equity strategist at UBS Wealth Management Americas. Follow UBS Americas on Twitter @UBSamericas.