Tech's bounce higher since the spring fueled the Nasdaq's rise to the 15,000 level. However, analysts said the index is now likely to rise at a slower pace, as cyclicals and value stocks stand to outperform into year-end. The Nasdaq Composite on Tuesday closed above 15,000 for the first time, marking the third 1,000-point milestone this year and the sixth since the pandemic began in 2020, according to Bespoke Investment Group. The Nasdaq rose again Wednesday, gaining about 0.1% to 15,041. The Nasdaq is up 16.7% in 2021, compared with a 19.7% gain in the S & P 500. For Nasdaq to do well, tech must do well since it is such a large part of the index , and some analysts see the sector and growth names contributing less to overall market gains going forward. Because the economy is expected to improve, cyclical names — like industrials and materials — have more room to gain than tech. "I just think the cyclicals...are going to give you better relative return into year end," RBC Wealth Management technical strategist Robert Sluymer said. "It's all part of that ebb and flow between cyclicals and growth. ... A lot of these cyclicals have been really hit hard and at least technically, they're starting to bottom." Sluymer said the 10-year Treasury yield will be a determining factor. The rate has been rising, which is something that could cool tech's gains. The yield, which was at 1.34% on Wednesday, is key since it is tied to important mortgage and other lending rates. But the benchmark yield also influences the stock market, particularly tech and growth, since the best earnings of those companies are expected to be in the future. A higher yield makes the cost of capital more expensive and reduces the value of future cash flow. "Maybe the dynamics within the Nasdaq might change," Lazard Asset Management head of U.S. equities Ron Temple said. "I think the broad market ... is in an environment that is inducive to ongoing appreciation though not at the pace we've seen." Temple expects interest rates to rise, and the 10-year yield is not reflecting the current strength of the economy. Yields move opposite price, so when the bond market reacts to positive economic news, typically that means prices fall and yields go higher. "I do expect a rotation back to near dated cash flows over long dated ... that might translate to value doing better than growth," Temple said. "But that doesn't mean I'm opposed to growth." Tech is up 1.8% over the past month, but some cyclicals have seen better gains. Financials are up 6.6%, and materials are 4.4% higher in the last month. Since July 1, tech has risen 6.5%, compared with a gain in financials of just 5.2%. In that period, materials are up 3.6%. In addition to favoring value over growth, higher rates may cause a bifurcation within tech. "There are parts of the Nasdaq that are more vulnerable," Temple said, noting that large-cap companies that generate a lot of cash flow could keep doing well but not rise as fast as they had. Temple said the types of companies that could be vulnerable are those where investors are betting on the cash flow in five to 10 years, but there's currently low revenues and even losses. With a 1.5% interest rate, $100 in cash flow would be worth $86 in 10 years, but if rates go to 2.5%, the cash falls to $78, he said. "I actually think some of the big tech companies are still values," he said. He added the market environment is favorable, with the Fed unlikely to raise interest rates any time soon. Oppenheimer technical strategist Ari Wald also expects the Nasdaq to go even higher. While cyclicals and value could do better, Wald said longer term tech is important since it will make the steadier gains. "If rates are swinging higher, tech won't necessarily be the top performer. You well get the market embrace beta and these reflationary names," Wald said, but added that tech should continue to rise. "It will be the semiconductor side of technology that does well in that sort of environment," he said. Big round number The actual 15,000 level on the Nasdaq is not particularly important, although it is psychologically. National Securities chief market strategist Art Hogan argues it is important since every big round number makes headlines, and that helps inform a broader group of potential investors about market performance. Hogan said the Nasdaq has gained 19% since March, and it could be impacted by another rotation away from tech and growth. That could favor broader market indexes like the S & P 500 , but that too is influenced by big tech names like Apple and Microsoft. "I think big round numbers bring in attention from places other than where folks are glued to every single tick," he said. He too expects tech to take a back seat to cyclicals and growth. "I think that's driven by the better news we've seen sequentially since July. I think the improvement in the economic data, earnings revisions going higher, possible peak in delta cases and the credible possibility of Congress passing the next infrastructure plan," he said. Hogan said the market should keep rising, and it is cheaper than it was earlier in the year because earnings revisions drove down the price-to-earnings ratio. The 12-month forward P/E on the S & P 500 is 20.5, but it was at 23 in April, he said. The forward P/E on Nasdaq is 28.5. "It shows you how much earnings have grown and how much estimates have gone up for the back half of the year,'" he said. According to Bespoke, the Nasdaq has fallen back below every thousand point marker it has achieved, with the exception of 6,000. After rising above 5,000 in March 2000, before the tech bubble burst, it took the next 6,256 days to trade above 6,000, in April 2017. "Since then, though, the Nasdaq has been making quick work of 1,000 point thresholds. With the exception of the 486-day gap between 8K and 9K, every other 1,000-point threshold since 6,000 has taken less than a year to cross. Even in the midst of a global pandemic, it took the Nasdaq less than six months to get from 9,000 to 10,000," according to Bespoke.
A Nasdaq market maker works at the Nasdaq Market site in New York, May 2, 2019.
Brendan McDermid | Reuters
Tech's bounce higher since the spring fueled the Nasdaq's rise to the 15,000 level. However, analysts said the index is now likely to rise at a slower pace, as cyclicals and value stocks stand to outperform into year-end.