The Nasdaq topped 20,000 for the first time on Wednesday, December 11, after a rally led by the ‘Magnificent Seven’ Big Tech stocks. The surge followed October’s inflation numbers which were in line with expectations, setting The Fed up to cut rates later this month. The economic data was also good news for the S&P 500 and the Dow Jones, both of which saw gains, but the big winners were in tech, where Tesla, Meta, and Amazon all reached new record highs.

Stock market rallies ahead of Fed meeting

Investors are now confident the Fed will cut interest rates again before the New Year, which remain at a 20-year high despite a 0.5-point cut in September. A Reuters poll of economists found 90 per cent of those surveyed believed The Fed would cut interest rates by 25 basis points this month, before pausing in January to weigh up new inflation data. Of 103 economists who were polled, 93 forecast interest rates to fall to 4.25 to 4.5 per cent, with only 10 expecting there would be no change. None of the economists predicted there would be an increase in rates.

As a result, Tesla beat its November 2021 all-time high of 414.50 to reach 424.77 after gaining 5.9 per cent, with Google gaining 5.5 per cent and Amazon climbing 2.3 per cent. Other big winners include Nvidia, up 3.1 per cent and Meta which put on 2.2 per cent.

The rally put the Nasdaq up 33 per cent on the year, fuelled by rapid growth in emerging technologies like AI and automation. Responding to the rally, Alex Morris of F/m investments said the big AI players were now “[T]he go-go stocks” in comments to Reuters.

On Wednesday the outlet reported that: “The Nasdaq Composite Index hit 20,000 for the first time on Wednesday, putting an exclamation point on a year in which excitement over artificial intelligence and expectations of falling interest rates fuelled a searing rally in technology stocks.”

Could the Nasdaq be headed for trouble?

Although tech investors appear to be clear winners, some analysts are reportedly cautious about the extent to which ‘megacap’ stocks are now dominating the Nasdaq. On Thursday MarketWatch said the Nasdaq rally could portend trouble for investors in the New Year, citing the Colony Group’s Richard Steinberg who warned a premature December rally would just eat into returns which would have arrived in January, saying “I think we are borrowing from Peter to pay Paul.”

The Investors Bulls vs Bears surveys has bulls up at almost 63 per cent – which IBD warns is a ‘yellow flag’ indicator of excessive bullishness. The IBD news editor warned cautioned investors:

“The market, or at least the Nasdaq, is starting to look stretched. It’s not at the point where investors should do proactive selling for that reason alone, though it’s a factor to consider as you mull whether to take profits in extended stocks.”

Nasdaq DEI proposals rejected

In other Nasdaq news, a proposal by the exchange to force companies listed with it to have women, ethnic minorities and sexual minorities on their boards has been rejected in an appeals court. The AP reported the rules would have required firms to “[H]ave at least one woman on their board of directors, along with one person from a racial minority or who identifies as gay, lesbian, bisexual, transgender or queer.”

Handing down its judgement on Thursday the New Orleans Court of Appeal ruled: “We are not aware of any established rule or custom of the securities trade that saddles companies with an obligation to explain why their boards of directors do not have as much racial, gender, or sexual orientation diversity as Nasdaq would prefer.”

Responding to the decision a spokesperson for Nasdaq said it stood by its proposals but would respect the decision of the court and would not seek to challenge it.

What is next for the Nasdaq?

Some analysts think there is plenty of road left to run for the Nasdaq. London-based investor Jon Smith said after a brief sell-off as investors take profits, Nasdaq bigwigs are set to climb higher. Writing for The Motley Fool he said:

“Yet after any potential pullback, I still see the long-term trend being higher for some key members, which should act to push the overall index up as well. For example, I hold shares in Tesla. The stock is up 79 per cent in the past year.

“Despite the surge, I feel it has fundamental drivers that should help it grow in the next couple of years. This includes the benefits from the new US President, who’s likely to champion domestic firms like Tesla over international rivals. Plans on easing corporate red tape and deregulation should also help the business.”

On the back of Wednesday’s numbers, one financial commentator said Nvidia would be a key Nasdaq stock to watch in 2025, and that its share price could beat $200 next year, saying:

“Looking ahead, Wall Street’s consensus estimate suggests that Nvidia’s EPS could come in at $4.43 in fiscal 2026. That places the stock at a forward P/E ratio of just 32.1. This means the stock will have to soar 82 per cent next year just to trade in line with its 10-year average P/E of 58.6, which implies a stock price of $259!”

How high will the Nasdaq go?

The Nasdaq’s landmark surge to 20,000 has been led by big gains for Big Tech. Propelled by the Magnificent Seven including Tesla, Meta, and Nvidia, the gains reflect investor enthusiasm for artificial intelligence and a loosening monetary policy outlook.

The Federal Reserve now looks all but certain to continue easing rates, with a further rate cut anticipated this month. These expectations, coupled with record-breaking performances from key technology players, have powered a 33 per cent gain for the Nasdaq this year.

Analysts note that the enduring appeal of AI and automation suggests scope for continued long-term growth. However, there are increasing warnings of excessive exuberance. The Nasdaq’s heavy reliance on a handful of mega-cap stocks has drawn scrutiny from market watchers, some of whom caution that such imbalances could heighten volatility in the new year.

Investor sentiment remains elevated, as evidenced by bullish surveys, but the nascent euphoria is tempered by calls for caution. While the optimism surrounding tech giants is not unfounded, it always pays to be vigilant as stretched valuations may warrant profit-taking in the near term. While no one can say with certainty where the market will go, all signs point toward a sustained bull run which will continue through 2025.