So far in 2024, the Nasdaq Composite has risen more than 20%, outpacing the S&P 500, which is 18.7% higher, largely driven by mega-cap tech stocks.
And, despite a more modest 9.7% gain for the Dow, it is currently trading at all-time highs.
Similarly, the S&P 500 Equal Weight Index, which has also had more muted returns, is up 10.5% so far this year. The Equal Weight Index normalizes weighting to reduce the impact of mega-cap names (Alphabet, Apple, Microsoft, etc.) and attempts to more broadly convey the performance of large caps, hence the lagging performance for much of the year.
[text_ad]
Why the performance mismatch? It could be any number of factors.
There are concerns that consumers are being more selective about where and how they spend money, now that excess savings from the pandemic have largely been spent.
At the same time, high-flying large-cap growth stocks have been the biggest beneficiaries of the still-evolving AI narrative that’s powered the lion’s share of this bull market. And big tech has been quite vocal for their need to spend more money on AI infrastructure buildout, which offers the promise of continued strength.
That investor perception (and the Nasdaq’s composition) is what created those returns and it’s what makes the Nasdaq important to growth investing.
Why is the Nasdaq different? It has a lot to do with the exchange’s origins. Back when the New York Stock Exchange was still the only game in town, the Nasdaq was just a quotation system and didn’t actually trade stocks. As the Nasdaq Stock Market got going, it included lots of stocks that traded as speculative over-the-counter (OTC) issues. But as the Exchange became the first U.S. stock market to start trading online, it attracted a swarm of new tech companies who saw it as a more modern, more dynamic place to list their stocks. Those companies included Apple, Cisco, Dell, Microsoft and Oracle and a host of others.
You can hear an echo of that period when the little report on the radio after the stock markets close calls the Nasdaq “the tech-heavy Nasdaq.”
The Nasdaq is especially important to growth investors exactly for that reason. The exchange’s heavy weighting toward tech and other “riskier” issues lets investors use it as a barometer of how much risk investors are willing to take on at any one time. If the Dow is leading the market, investors are risk-averse, and growth issues are out of fashion.
But when the Nasdaq leads the way, investors’ risk appetite is keen, and growth investors can ramp up their own risk accordingly.
Conversely, when the appetite for risk is low, the Nasdaq tends to lead the way in the other direction, as we saw in 2022.
Cabot offers a variety of advisories that can help you identify stocks that will outperform the market and provide better returns to investors. Click here to find out which growth stocks are on our radar.
[author_ad]
*This post is periodically updated to reflect market conditions.