It's no secret by now. 2023 has been a great year for tech stocks. The Nasdaq Composite (^IXIC 2.02%)is up a whopping 44% through Dec. 28. Tech stocks have rebounded from 2022's bear market thanks to rock-bottom valuations to start the year and excitement over artificial intelligence (AI), which has paced some of the biggest gainers in the tech sector.
While the Nasdaq's gains have been impressive, there's another well-known tech index that has done even better than the Nasdaq Composite. That's the Nasdaq-100, which is composed of the 100 largest non-financial Nasdaq stocks and is up 54.5% with one day left to go in 2023. The largest exchange-traded fund (ETF) that tracks it, the Invesco QQQ Trust (QQQ 1.54%), is up by the same percentage.
The Nasdaq Composite is still short of the all-time high it reached in November by about 7%, but the Nasdaq-100 set an all-time high on Dec. 19 and has continued to climb from there.
Market cycles take long enough that there have only been a few times in history when the Nasdaq-100 and the Invesco QQQ ETF set a fresh all-time high after a bear market. Let's take a look at those times and what's likely to happen with the Nasdaq-100 next.
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The history of the Nasdaq-100
The Nasdaq-100 was founded in 1985, and the Invesco QQQ ETF was formed in 1999 during the height of the dot-com bubble.
Through the 1980s and 1990s, the Nasdaq-100 moved steadily higher before skyrocketing in the late 1990s during the dot-com boom. The chart below captures the index's movement starting from 1994.
As you can see, the index fell sharply from its peak in March 2000 to August 2002, losing 78% of its value, and it would take more than a decade for it to recoup those losses. The Nasdaq-100 rose over the next five years but then fell sharply again during the financial crisis, losing more than 50% of its value.
The index wouldn't eclipse its 2000 peak until 2015. Following that, the Nasdaq-100 dove briefly when the COVID-19 pandemic began in March 2000 and then surged until November 2021 when the pandemic bull market peaked.
Looking back at history, the Nasdaq-100 has only set an all-time high following a bear market one other time, but 2015, which came several years after its 2000 peak, seems like a poor analog.
A better comparison
2023 marked the Nasdaq-100's best year since the dot-com boom era, and there's a good reason for that. The generative AI revolution could be as transformative as the internet. You don't have to take my word for it. Here's what some of the top tech CEOs have said about it:
Oracle's Larry Ellison said, "Is generative AI the most important new computer technology ever? Probably." Bill Gates said it was the most important technological advance in 40 years, and Elon Musk called it the most powerful tool for creativity that has ever been created.
The excitement around AI shared by tech's biggest luminaries and retail investors has helped propel the big tech stocks that make up much of the Nasdaq-100 and the Invesco QQQ Trust.
Given the unique moment at the beginning of the generative AI boom, it may be better to compare the current Nasdaq to the early days of the dot-com boom or the index or the beginnings of the mobile era, which coincided with the recovery from the financial crisis.
Is Invesco QQQ Trust a buy?
Valuations for the top tech stocks are expensive right now as the Nasdaq-100 currently trades at a price-to-earnings (P/E) ratio of 30.
However, that valuation seems justified considering that the payoff from generative AI still looks to be in the future for the top tech stocks. Data-center buildouts and construction of other vital infrastructure have been constrained by a chip shortage thus far, and companies are still rolling out and developing new AI-focused products, which will take shape over the coming years. Additionally, revenue growth at the top companies is accelerating from the nadir during the bear market.
In other words, it seems likely that the Invesco QQQ Trust will continue to gain as long as optimism for AI remains, and with the generative AI boom still at the development stage, the momentum seems set to continue. Using history and past tech booms as a guide, it looks like more gains are in store for the Invesco QQQ ETF and the Nasdaq-100.
