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Where next for the NASDAQ composite index after Monday's record high?

The tech-heavy NASDAQ composite index hit a record high of 16,205 points on Monday. But with Jerome Powell set to continue as Chairman of the Federal Reserve, tightening monetary policy could take the wind out of its sails.

The NASDAQ composite briefly hit an all-time high on Monday, before falling back to 15,775 points today. The index is up 3.6% in the past month and 31% over the past year. Longer-term stakeholders have seen their investment rise 192%, or 10,376 points, over the past five years.

Its only serious dip was during the Covid-19 pandemic induced mini-crash, where it lost almost 3,000 points in less than a month. But since then, it’s gone from strength to strength.

NASDAQ: tech-heavy stocks

The NASDAQ composite index is comprised of more than 3,000 stocks on the NASDAQ stock exchange. Like other indexes, its weights itself by market cap, with the top ten companies on the index making up more than a third of its value.

These include the global heavyweights, Apple, Microsoft, Amazon, Meta (Facebook) and Alphabet (Google). The final FAANG stock, Netflix, is also on the index, but just misses out on the top ten. Investor favourites Tesla, NVIDIA, PayPal and Intel also feature.

Investors in the NASDAQ get to benefit from the stable growth and stability of these established blue-chip businesses, while also gaining exposure to thousands of riskier companies. However, it is heavily weighted towards tech stocks.

And what happened to the Zoom share price yesterday is perhaps a sign of investor concerns over the future growth prospects of tech stocks right now. In Q3 results, the video conferencing company saw total revenue rise 35% year over year to over $1 billion. The number of customers contributing more than $100,000 to TTM revenue rose to 2,507, up 94% year over year. Regardless, it warned investors to expect a post-pandemic slowdown, and its share price has fallen 20% from $248 on Monday to $198 as I write.

Powell's renomination

It’s no coincidence that the NASDAQ fallback came after Federal Reserve Chair Jerome Powell was renominated to his position by the Biden government. Faster tapering of federal quantitative easing and increased interest rates by mid-2022 are now significantly more likely.

And this could be a problem for the NASDAQ composite. Many of its tech companies are fuelling their rapid growth through cheap debt. And with an interest rate rise nearing across the pond, the cost of debt will rise, which could see the handbrake applied to growth plans. And this would result in increased volatility.

But Powell continuing in his role could also be good news in the long run. As a Republican, his reappointment demonstrates that Democrats are prepared to prioritise stability over partisan politics. And with the economic situation precarious, markets will appreciate some certainty at the helm of the USA’s central bank.

Moreover, this week’s dip can also be attributed to several other factors. Inflation has soared to 6.2%, while the labour crisis is starting to hurt productivity. And microchip shortages are affecting tech stocks significantly more than the rest of the market.

It’s also possible that after such a long bull run, some investors are cashing out at what they perceive to be the top of the market. They might be reinvesting in a less volatile index, like the S & P 500, which is made up of the USA’s 500 largest companies by market cap. Or they might be heading towards bank stocks that have historically done well in inflationary, higher interest environments. JPMorgan, Wells Fargo and Bank of America are all up this week.

The NASDAQ composite index could see new highs as companies approach the crucial Christmas trading period. But as monetary policy tightens over the coming months, many of its less well-established tech stocks may start to see growth slow. What do you think will happen next?

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*Based on revenue excluding FX (published financial statements, June 2020).

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