Will The Santa Rally Lead Wall Street To New All-Time Highs Soon?

The S&P 500 and Nasdaq made new highs during a strong earnings season in November 2021, even with raising concerns about inflation and ongoing supply chain problems.

Trillion Dollar Companies Dominate The Market

With Apple Inc. AAPL, Microsoft Corporation MSFT, Alphabet Inc. GOOG, Amazon.com Inc. AMZN and Tesla Inc. TSLA, five companies with over a trillion market cap dominate the S&P 500. Since January 2021, they have beaten analysts' expectations like estimated EPS and estimated revenue significantly. Twenty quarterly earnings reports have been published this year. Only three times, the EPS came out lower than expected. 

Meta Platforms Inc. FB and NVIDIA Corporation NVDA are likely to join the trillion market cap club soon. Mark Zuckerberg introduced Meta on October 28, 2021. The metaverse announcement was well received by market participants, and the price per share is currently only 14% away from the 52-week high, with a market cap of over 923 billion. In addition, NVIDIA reported higher than expected earnings on November 17, 2021, due to the high demand for gaming chips and data center services. NVIDIA's market cap is around 750 billion right now.

Crypto and EV

Not only the stock market but also cryptocurrencies are still on the rise. For example, Bitcoin marked a new all-time-high November 10, 2021, at $69,000. The much anticipated debut of the first Bitcoin ETF on the NYSE sent Bitcoin to those highs. However, Bitcoin remains to be a speculative investment. The volatility is exceptionally high, and just one Tweet can cause extensive movements. Between April 14, 2021, and July 19, 2021, Bitcoin lost more than 50% of its value, crashing from $65,000 to less than $30,000 due to crypto ban discussions in China. Only four months later, Bitcoin locked in the new record high in November.

Another hot sector is the EV market. Rivian Automotive Inc. RIVN had its IPO on November 10, 2021, and opened at $106.75 on the first trading day. Five trading days later, it marked its current all-time-high at $179.47 on Nasdaq before it fell back to below $110 only four days later, and to its lows on December 20, 2021 at $88.40 per share. Those who got their shares at the official IPO price of $78 per share are still up 23%+, while investors who got into the stock at its high lost 46% of their investment so far.

Similarities To The Dot-Com Bubble Burst

The volatility brings back memories to the dot-com bubble burst of the year 2000 when similar things happened before the market collapsed.

For example, Yahoo's stock price was up more than 200% from its IPO price of $13 on its first day as a public listed company on April 12, 1996. It opened at about $24.50, went as high as $43 and closed at $33.

On November 13, 1998, the stock of theglobe.com went public and soared over 600% on its first day. The IPO price was at $9 per share, and it reached $98 early in the day to settle finally at $63.50 on Nasdaq on the first trading day.

Another one was the VA Linux System debut, with gains of nearly 700% on December 9, 1999. The IPO price was $30, and the stock soared to $320 on the first day before it dipped to $250 at market close.

Between 1998 and 2000, the Nasdaq Composite went up from 1,503.22 to 5,048.62 (+236%). Then the Nasdaq Composite collapsed over the course of 2 years and hit a low on October 7, 2002, at 1,108.49 (-78%).

Since the financial crisis in 2008, we only had one year (2018) with a negative S&P500 performance. On average, the S&P 500 grew by over ~15% since 2009, compared to ~10% between 1986 and 2008.

Young investors did not see a stock market crash happen yet, but many new market participants that entered the stock market last year already realized that stocks don't go up forever.

The key question is how market participants react once the market starts to consolidate.

Alexander Voigt is the Chief Executive Officer and founder of daytradingz.com. He does not hold any positions in the mentioned stocks.