US tech stocks have powered the Nasdaq-100 Index (NASDAQ: NDX) to a new all-time high in March. It has climbed 53% in the past year and 66% since the beginning of 2023. The Betashares Nasdaq 100 ETF (ASX: NDQ) has seen a similar rise.
But has it risen so far that it's now in bubble territory like we saw in 1999? Around 24 years ago there was a big crash in tech stock valuations after going to extraordinary levels.
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Bubble territory?
There has been enormous interest in artificial intelligence, leading to rising share prices for names like Nvidia and Microsoft.
While there has been a lot of market excitement about those stocks, those businesses have seen a large increase in revenue and profit. In contrast, the dotcom bubble saw crazy valuations for businesses that weren't making much revenue, or none at all.
The Australian reported on comments from David Philpotts, the Schroders head of strategy for QEP global shares.
He doesn't think the AI boom is a repeat of the late 1990s, suggesting that share prices and valuations were "far more reasonable" than the dotcom boom and currently they're "not particularly expensive". He then said:
Because of its strong earnings growth, Nvidia is actually looking quite reasonable. But the key question is how long that strong earnings growth keeps coming through.
Nvidia is doing very well. It recently announced quarterly revenue of US$22.1 billion, which was a 265% rise year over year, while annual revenue was up 126% to US$60.9 billion.
The estimate on Commsec suggests the business is valued at 37 times FY25's forecast earnings.
Philpotts suggested there isn't an obvious catalyst to turn investors off (NASDAQ) AI businesses. That could be helpful for supporting the Betashares Nasdaq 100 ETF unit price if there's no obvious troubling bad news on the horizon.
Goldilocks to be achieved for the NASDAQ?
Central banks like the RBA have been trying to engineer a situation soft landing that reduces inflation but doesn't put economies into a painful recession. The Goldilocks situation is finding the right balance. Philpotts was quoted by The Australian, saying:
My caveat is that hard landings look soft originally but it looks like we're going to have something more like a Goldilocks scenario.
But in terms of what that means for markets, I think we're on the cusp now of moving beyond the fundamentals. I'm not saying we're in a bubble, but you could argue there's lots of good news in the price. We've got some uncertainty this year around elections and geopolitics more generally.
I don't know what the catalyst is going to be, but there's a lot of good news in the price.
In the early stages of bubbles, there's often a big theme, like AI, there's often a lot of liquidity – and it's debatable how much liquidity is out there, but it doesn't feel like we're in a tight environment now.
Normally in a bubble there's an excessive amount of retail participation, which is not really the case now, despite some recent commentary about retail buying of Nvidia. We're not seeing a retail buying frenzy like we have seen in the past, so you could argue the case for a melt-up from here.
While the NDQ ETF and NASDAQ could go higher, solid ongoing revenue/earnings growth would be necessary to keep delivering good US share market returns over the longer term at this level. But Philpotts is "modestly positive" on the 'magnificent seven' NASDAQ stocks, though he is least positive on Tesla and Apple.
He suggests there are better opportunities outside of the US, though there is more "cyclical risk".
I think there are still opportunities in the ASX share space.
