by Saqib Iqbal Ahmed, Suzanne McGee and Lewis Krauskopf

NEW YORK (Reuters) – The Nasdaq index surpassed the 20,000-point mark for the first time on Wednesday, the high point of a year in which enthusiasm for artificial intelligence (AI) and expectations for interest rate cuts have fueled the meteoric rally in technology stocks.

The tech-heavy index has gained more than 33% for the year, driven by momentum from tech companies, including Apple, Nvidia, Google parent Alphabet, and in recent weeks, the automaker Tesla electrics.

Wednesday’s gains were fueled by U.S. inflation data that bolstered bets the Federal Reserve (Fed) will cut interest rates at its meeting next week.

The index closed on Wednesday with an increase of 1.8% at 20,034.89 points.

The rally rewarded investors who bet on growth and technology, but it also raised concerns about rising valuations and the dominance of large caps, which are now increasingly weighing on the index.

“There is definitely a chase aspect towards the end of the year, where the winners…keep winning,” said Cameron Dawson, chief investment officer at NewEdge Wealth.

“The question is whether this dynamic can continue into 2025, where stretched valuations, positioning, sentiment and growth expectations could all pose obstacles to sustaining above-average returns.

After falling in early 2020, when the COVID-19 pandemic paralyzed economic activity around the world, the index quickly recovered when the Fed reduced interest rates to a level close to zero and the United States government has initiated stimulus measures to support the economy.

In 2022, however, the index fell 33% as inflation reached 40-year highs and the US central bank implemented a series of massive interest rate cuts.

Rising borrowing costs did not trigger the feared recession, and the index has risen about 90% since then, thanks in part to growing enthusiasm for the commercial potential of AI.

Nvidia shares, whose chips are considered the industry’s gold standard, have risen more than 1,100% since their low in October 2022.

“The AI ​​story is still relevant and attractive to investors,” notes Alex Morris, chief investment officer of F/m Investments. “These are the most popular stocks.”

The valuation of the Nasdaq has increased, but it is still far from the levels reached during the dotcom bubble more than twenty years ago.

According to LSEG Datastream, the index currently trades at around 36 times earnings, its highest level in three years and well above its long-term average of 27 times. This figure is still well below the approximately 70 times the index’s price-to-earnings (P/E) ratio reached in March 2000, reassuring investors comparing the two periods.

“The latest Nasdaq rally is not comparable to that of the late 1990s and early 2000s. It progressed more gradually and therefore does not yet appear unsustainable,” writes Jessica Rabe, co-founder of DataTrek Research, in a note dated Wednesday.

Large caps increasingly dominate the index: the 10 largest companies by market value represent 59% of the Nasdaq, up from 45% in 2020.

The three largest companies in terms of weight are Apple, Microsoft and Nvidia, which represent 11.7%, 10.6% and 10.3% of the index, respectively.

This high concentration could, however, pose a problem for investors if the technology giants lose their popularity. In 2022, for example, two index heavyweights, Meta and Tesla, fell 64% and 65% respectively over the year.

The Nasdaq has also outperformed other major U.S. stock indexes this year, thanks to gains in heavily weighted names such as Nvidia, Amazon and Meta. The 33% increase in the Nasdaq in 2024 contrasts with that of 27% in the S&P 500 and 17% in the Dow Jones.

Over the past decade, the Nasdaq has gained more than 320%, compared to 200% for the S&P 500 and 150% for the Dow Jones.

( Diana Mandiá, edited by Kate Entringer)

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