The Nasdaq hit 5,000 again. Time to head for the hills, right?
Maybe not this time.
The technology-heavy Nasdaq composite index nudged through the symbolic point barrier for the first time since March 2000, shortly before what was known as the dot-com bubble burst in a dramatic collapse.
The steady climb, to 5,008.10 on Monday, was far more gradual, and the underlying fundamentals much more sound than the first time around, analysts said.
Amid the euphoria of the dot-com era when the Web was fairly new and the Internet promised boundless opportunity, stock prices became untethered from profits — even revenues — in the belief that the Internet would so transform the economy that conventional valuation metrics would be rendered obsolete.
“It doesn’t resemble the speculative excesses that were in effect when it last set a record high,” said John Lonski, chief capital markets economist at Moody’s Analytics.
At the bubble’s peak, key components of the Nasdaq index traded at more than 50 times future earnings, Lonski said, calling them “nosebleed” levels. And the broader index traded even higher.
The market for initial public offerings then was the boom’s primary pump. As new stocks such as Yahoo Inc. rocketed up with no end in sight, a speculative frenzy took hold. Those who missed Yahoo wanted in on the next IPO.
The craze hit a peak with the Dec. 9, 1999, IPO of VA Linux Systems, a Sunnyvale, Calif., company that sold computers geared to run the Linux operating system.
The company had set its opening price at $ 30 a share. On its first day, shares climbed to $ 239, which defied rational explanation even among tech-stock boosters. The crash came the following spring. By September 2000, VA Linux stock traded at $ 8.49.
Today’s market, however, is underpinned by the likes of Apple Inc., whose market value of $ 748 billion accounts for more than 10% of the Nasdaq’s composite valuation. Meantime, companies such as Facebook Inc. and Google Inc. are enjoying strong earnings, at least for now.
The Nasdaq’s price-to-earnings ratio, a key measure of a stock’s value, is about 18 times estimated future earnings, said Lonski, who called it well within levels considered sustainable.
The Nasdaq index is only a short distance from its record close of 5,048.62 on March 10, 2000. Should it break that level, it would join the blue-chip Dow Jones industrial average and the Standard & Poor’s 500 index, both of which have hit new highs often over the last year.
On Monday, they did so again. The Dow rose 0.9% to 18,288.63; the S&P 0.6% to 2,117.39. Nasdaq added 44.57 points, or 0.9%.