(Bloomberg) — The Nasdaq Composite Index jumped above 5,000 for the first time in 15 years, extending a rally founded on profits that have risen nearly 200 percent in six years.
Pushing higher for a fifth week, the gauge climbed 0.9 percent to 5,008.09 at 4 p.m. in New York, surpassing a level it has exceeded on only seven other days, all of them in March 2000. Nine straight quarters of gains led by a 70 percent surge in Apple Inc. have lifted the index within 1 percent of its all-time high of 5,048.62 reached March 10, 2000.
Momentum is building in stocks that have the fastest profit growth, with companies from Apple to Intel Corp. spending more money than anybody else to buy back shares. While the advance has brought the Nasdaq close to new highs, valuations are only a fraction of where they were 15 years ago.
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“The difference between Nasdaq today and Nasdaq 15 years ago is many of the strongest companies in Nasdaq have had good earnings and are not at stretched valuations,” Michael Strauss, chief investment strategist and chief economist at Commonfund Group in Wilton, Connecticut. “You don’t have the story stock frenzy of 1999, 2000. Stocks are much more rationally priced for many sectors.”
The measure will climb 8.5 percent over the next 12 months to 5,433, according to analyst price targets compiled by Bloomberg. Income from computer and software companies will increase 15 percent this year, the most among 10 S&P 500 industries, versus 2.3 percent growth for the whole index, analysts’ estimates show.
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Unlike the dot-com era, when investors snapped up Internet companies with promise but little profit, today’s gains are built on earnings driven by demand for products such as Apple’s iPhone and Google Inc.’s web-search services.
Information technology, the biggest industry in the S&P 500 with a 20 percent weighting, accounted for 19.3 percent of the full index’s operating earnings last year, data compiled by S&P Dow Jones Indices show. In 2000, when technology stocks commanded nearly a third of the gauge, the group’s profits were 12.8 percent of the total.
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While the stretch of rallies is unprecedented, the pace of gains is not close to the dot-com era. Over the two years leading up to the 2000 peak, the Nasdaq Composite surged 189 percent and nearly 50 stocks, including QLogic Corp. and NetApp Inc., soared at least 10-fold.
Since the start of 2013, the index has risen 66 percent, and no stock is up more than 10-fold.
Steadier gains kept valuations in check. The Nasdaq Composite trades at less than 32 times earnings, versus a multiple of 175 in March 2000. Among the biggest companies tracked by the Nasdaq 100 Index, the top 10 best performers since 2013, including Netflix Inc. and Facebook Inc., are valued at an average 51 times profit.
Eight of the top 20 stocks in the Nasdaq 100 at the bubble’s peak no longer exist as standalone public firms, including WorldCom Inc., Sun Microsystems Inc. and Global Crossing Ltd. Among the survivors, the 10 biggest winners over the final two years of the Internet frenzy garnered an average P/E ratio of 808. EBay Inc. was valued at 3,220 times profit and Yahoo! Inc. traded at 648. Today, the two have a multiple of 24 and 36, respectively.
“You had to go through the first bubble blow-up to get here, and out of the destruction rose companies like Facebook, Google and Apple, companies turning so much more profit,” Rick Fier, director of equity trading at Conifer Securities LLC in New York, said in an interview. “It’s amazing to see it back here. Most of us thought it never would be.”
Relative to other industries in the S&P 500, technology valuations are in the middle of the pack, trailing health-care and consumer stocks with a P/E ratio of 20.
It has taken two bull markets and more than 4,500 days for the Nasdaq to get close to making up all the ground lost in the dot-com collapse. The S&P 500 and Dow Jones Industrial Average reached all-time highs in October 2007 and again in March 2013.
The Nasdaq Composite’s break above the 5,000 threshold proved fleeting in 2000. It happened only twice on a closing basis, with the measure plunging 2.8 percent, 4.1 percent and 2.6 percent in the three days after it ended at 5,048.62. The ensuing 2 1/2-year tailspin sent it down 78 percent from its closing record.
“We’re going to keep going — technology has had very good earnings and the multiples are reasonable,” Donald Selkin, the chief market strategist at New York-based National Securities, which oversees $3 billion, said in a phone interview. A close above 5,000 “will draw more people in because they’ll say ’oh gee, it’s crossed the threshold so that means everything’s OK so we should jump in,’” he said.
To contact the editors responsible for this story: Jeff Sutherland at email@example.com Jeremy Herron
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