Executive Summary
The Story So Far
Why This Matters
Who Thinks What?
The Nasdaq Composite index has officially entered its seventh bull market since 1990, rebounding from a bear market earlier this year that saw the technology-heavy index fall 24% below its record high. This turnaround, which commenced on April 8, suggests potential for significant upside in the coming years, though current valuations present a nuanced outlook for investors.
Nasdaq’s Role in the Market
The Nasdaq Composite serves as a key benchmark for growth and technology stocks within the U.S. market. It differentiates itself from the broader S&P 500 and the blue-chip focused Dow Jones Industrial Average, providing a specific gauge for innovative and high-growth companies.
The preceding bear market was triggered when President Trump introduced sweeping tariffs, leading the index to close 24% below its peak on April 8. This low point subsequently marked the beginning of the current bull market.
Historical Performance and Current Trajectory
A bull market is commonly defined by a 20% advance from a previous bear market low and the attainment of a new record high. Historically, the Nasdaq Composite has demonstrated robust performance, returning an average of 281% over an average duration of 1,817 days (approximately five years) during its past six bull markets since 1990. This equates to an average annual compound growth of 31% during these periods.
Since the current bull market began on April 8, the index has already advanced 47%. If its performance were to align with historical average returns, the Nasdaq could still climb an additional 234% before the current bull market concludes, or achieve a 31% gain in the next year based on average annual compounding.
Valuation Considerations
Despite the historical precedent for substantial gains, current market conditions warrant consideration. The Nasdaq-100, which tracks the 100 largest non-financial stocks within the Composite, is presently trading at 35 times earnings. This valuation represents a material premium compared to its 10-year average of 26 times earnings, suggesting that future returns might not fully align with past averages due to elevated valuation levels.
Investment Vehicle: Invesco QQQ ETF
For investors seeking exposure to growth stocks within this market, the Invesco QQQ ETF tracks the Nasdaq-100. This index fund is heavily weighted towards technology stocks, comprising 64% of its holdings, with consumer discretionary stocks making up another 18%. Its top holdings include prominent companies such as Nvidia, Apple, Microsoft, Alphabet, and Amazon.
Since its inception in 1999, the Invesco QQQ ETF has generated a 1,330% return, equivalent to 10.5% annually, navigating various economic and market conditions. Fund managers anticipate similar long-term returns, particularly citing artificial intelligence as a significant tailwind for the technology-heavy Nasdaq-100. The ETF maintains an expense ratio of 0.2%, translating to an annual fee of $20 for every $10,000 invested.
Market Outlook
While the Nasdaq Composite’s entry into its seventh bull market since 1990 presents a historical precedent for substantial gains, investors face a market with elevated valuations. The Invesco QQQ ETF offers a diversified avenue into this growth-oriented index, balancing historical performance with current market dynamics and potential future tailwinds like artificial intelligence.
