Nasdaq Composite Index Hits 5,000 Milestone: What's Driving The Index In 2015 Vs Dotcom Bubble?

UPDATED: 4 p.m. EST

The Nasdaq composite is within spitting distance of its all-time closing high of 5,048.62, set on March 10, 2000, a record hit just before the dot-com bubble burst. But the index could hit the mark faster than previously thought after the Nasdaq hit the psychologically important 5,000 milestone in morning trading Monday. The Nasdaq gained 44.57 points, or 0.9 percent, to close at 5,008.10 Monday after climbing as high as 5,008.57 in afternoon trading.

Though technology companies are powering the Nasdaq's current upward trajectory just as they did in 2000, the index itself looks very different a decade and a half later. Technology still makes up around 43 percent of the Nasdaq composite, but the sector was nearly 57 percent of the index at the height of the tech bubble in 2000. The Nasdaq now has sizable positions in the health care and consumer discretionary sectors. The consumer services sector comprised only 0.5 percent in 2000 versus 21 percent in 2015, while the health care sector contributed only 4 percent 15 years earlier compared with 16 percent now.

"Those are three industries that we think are poised to do well in the current stock market environment,” said Dan Farley, regional investment strategist at U.S. Bank Wealth Management in Minneapolis.

The Nasdaq was much different in 2000 because it was mostly comprised of Internet stocks; however, now the index has broader listings, including biotechnology and health care companies. There has been continued strength so far in 2015 in the health care sector and analysts are beginning to see outperformance in the technology and consumer discretionary sectors, which was largely absent most of last year, according to Mark Newton, chief technical analyst at Greywolf Execution Partners Inc.

Another big difference between 2015 and 2000 is that most dot-com stocks were trading at a significant disparity of what their earnings results were. “Stocks were off-the-charts expensive back then and in retrospect, were much more expensive at that peak than now,” Newton said.

The Nasdaq composite’s price-to-earnings ratio, or the ratio of a company's current share price to its per-share earnings, is currently 24 compared with 194 during the index’s peak in 2000, according to FactSet. This means investors were willing to pay $194 for every dollar of earnings that the companies in the Nasdaq generated in 2000.

A missing factor between now and then is the rise of tech giant Apple Inc., which wasn’t among the largest 20 companies by market value in the Nasdaq in 2000. However, the iPhone maker’s market capitalization has grown more than $755 billion since 2000, increasing from $4.8 billion in December 2000 to $760 billion today. Apple now represents more than 10 percent of the Nasdaq’s value.

The Nasdaq hit its highest level since March 2000 on Feb. 12 after Cisco Systems Inc.’s stock price jumped more than 9 percent, driven by strong earnings from the network equipment maker. The recent gains in the Nasdaq are also attributed to the older technology names that have really been doing well in the past two years, such as Microsoft Corporation and Cisco Systems. “These companies are trading at fractions of where they were in 2000. Even Apple is trading fair as far as a valuation metric is concerned,” Snyder said.

Not only are the type of companies participating in the Nasdaq broader, but even the Internet stocks such as Facebook Inc. and LinkedIn have strong earnings growth as opposed to overvalued dot-com stocks 15 years ago. “Everything then was based on a hope and a dream. Now we’re trading on earnings,” Karl Snyder, chief market strategist at Garden State Securities, said.

Srinivas Thiruvadanthai, director of research at the Jerome Levy Forecasting center, agrees. “People wanted to take risks then because they believe in the story how the Internet was going to change the world. More people now are rationalizing higher valuations because interest rates are low so they need to find returns,” Thiruvadanthai said.

Companies also have much more solid balance sheets this time around, including in the biotech space. “If you take a step back and look at Celgene and Biogen Idec, those companies all have earnings growth, and they’re really the ones that are driving the Nasdaq higher,” Snyder said.