A surge in tech stocks helped push the Nasdaq composite index to an all-time high Thursday, eclipsing a record set at the peak of the dot-com boom 15 years ago.
Unlike the boom days that quickly went bust, though, there's good reason for Nasdaq's steady climb from the Great Recession, analysts said: It's the earnings.
The Nasdaq edged up 20.89 points, or 0.4%, to 5,056.06 as other major indexes also rose. The record of 5,048.62 was set March 10, 2000, when wild speculation in Internet and other tech-related stocks, along with now-discredited practices of Wall Street's sales machine, pushed stock prices far beyond even reasonable valuations.
Analysts said today's market is undergirded by conventional financial metrics, principally earnings and revenue growth, as well as huge cash stockpiles in the coffers of tech giants such as Apple Inc., Google Inc. and Microsoft Corp., all components of the tech-heavy Nasdaq.
“The revenue growth in some cases has been phenomenal,” said John Lonski, chief capital markets economist at Moody's Analytics.
He said the tech sector is proving that its products, such as Apple's watch, can create strong demand even in an environment when the rest of the U.S. economy is growing at a slower rate than originally forecast at the start of the year.
“There's no telling what the demand for these new products might be,” Lonski said. “If they catch on, they can grow faster than the demand of a subpar economy.”
The Standard & Poor's 500 index was up 4.97 points, or 0.2%, to 2,112.93; the Dow Jones industrial average rose 20.42 points, or .01%,to 18,858.69.
So far this year, the Nasdaq has risen 6.8%, far outpacing the S&P 500's 2.6% pace and the Dow's 1.3%. Even over the last 12 months, the Nasdaq's 22.5% growth is more than double that of the S&P and the Dow, according to FactSet Research Systems Inc.
Of course, the Nasdaq has changed since the bubble days. The share of technology companies in the index is now 42%, down from 65% in 2000. The biggest company today is Apple, with a market capitalization of $749 billion; then it was Microsoft, at about $525 billion. Microsoft is still big today, at about $353 billion.
An underappreciated Nasdaq component is healthcare, which has been growing faster than the rest of the economy, and, with technology, makes up two-thirds of the Nasdaq's market value. Healthcare-related stocks are up 28% in the last 12 months, according to FactSet.
But still, a significant piece of Nasdaq's power can be chalked up to a single company: Apple. Its market value has surged to more than $750 billion from $22.5 billion in March 2000. The company accounts for 10% of Nasdaq's value.
Just four tech giants — Apple, Google, Microsoft and Cisco Systems Inc. — held a total of more than $360 billion in cash reserves, almost a quarter of all corporate cash reserves in the U.S., New York investment giant Blackrock Inc. noted in a research report.
That cash can drive share prices, either through investments or financial maneuvers such as stock buybacks. It also helps tech stocks outperform the rest of the economy during a time when the Federal Reserve is expected to raise
interest rates, because companies with large stockpiles of cash can rely less on borrowing for growth.
The tech sector also is benefiting from lowered expectations that accompanied a pullback in the U.S. economy in the first quarter, when many analysts dropped growth forecasts below their original targets of 3%, Russ Koesterich, Blackrock's chief investment strategist, said in an interview.
“The crossbar is a lot lower than it was a couple of months ago,” Koesterich said.
Indeed, after breaking the symbolic 5,000-point barrier in early March, the Nasdaq had a bumpy ride until early April, when it began a jagged climb to Thursday's record.
“We did have a stalling of tech stocks earlier,” said Sam Stovall, U.S. equity strategist for S&P Capital IQ. “This is sort of making up for lost ground.”