Nasdaq Might Fall as Valuation Stretched Shut To “Bubble” Stage

Supply: IG Charts

NASDAQ INDEX FUNDAMENTALOUTLOOK:

• Buying and selling at a 50.4 price-to-earnings (P/E) ratio, Nasdaq’s valuation has reached an inhibitive stage
• Wealthy valuation amid rising Covid-19 viral threat renders Nasdaq susceptible to a pullback
• China’s Shenzhen Composite, buying and selling at 31.9 P/E ratio, can be inclined to profit-taking

Nasdaq Index Outlook:

With a historic 41% three-month achieve by means of June, Nasdaq inventory market benchmark has not solely erased the entire losses from earlier this 12 months amid Covid-19 pandemic outbreak, but in addition grew to become the second-best performing main index globally, simply behind China’s Shenzhen Composite (desk beneath). In the meantime, the S&P 500 index (SPX) and Dow Jones Industrial Common (Dow) have delivered 0.15% and -6.61% year-to-date return, respectively.

Main World Indices YTD Efficiency (as at 8am GMT, 24th July 2020)

Supply: Bloomberg, Dailyfx

Nasdaq’s astonishing efficiency year-to-date was underpinned by the Fed’s limitless financial stimulus pledge, resilience in technology corporations throughout pandemic interval, and the prospect of a post-crisis financial restoration. In consequence, Nasdaq’s valuation has been propelled to a 50.Four price-to-earnings (P/E) ratio because the index hit historic highs this week. Wanting again, a P/E ratio above 40.Zero has confirmed prohibitive for the index beforehand (chart beneath).

Nasdaq Index vs. historic P/E ratio 2010 – 2020

Supply: Bloomberg, Dailyfx

The 2 sturdy pillars of Nasdaq’s rally – earnings resilience and hope for a restoration – at the moment are being questioned by cautious buyers as a second viral wave hit the ‘solar belt’ states of the US, and swept a lot of the rising world. US Covid-19 infections have topped Four million this week. Evidently delaying the reopening of the total financial system is beginning to have a unfavorable affect on the job market, which was mirrored on this week’s jobless claims information.

In consequence, the chance of a significant pullback within the expertise benchmark, alongside the S&P 500 and Dow Jones Industrial Common, appears to be rising. A spat between the US and China over the closure of one another’s consulates in Houston and Chengdu, have additional dampened threat urge for food.

Gold and silver, as perceived safe-haven belongings, have seen their costs surging to 9-year highs this week, boosted by rising demand for security.

In sum, fasten your seat belt, as volatility within the inventory markets could begin to rise as we enter into the month of August – a seasonally unstable month. August ranks the second worst-performing month for the Nasdaq prior to now ten years, delivering a 10-year common month-to-month return of -0.19%. Solely Might ranks worse (-0.38%).

Nasdaq Index – Each day Chart

— Written by Margaret Yang, Strategist for DailyFX.com

To contact Margaret, use the Feedback part beneath or @margaretyjy on Twitter