The surge of artificial intelligence (AI) is sparking a transformative shift in the relative valuations of prominent U.S. stock averages as the tech sector outperforms other industries and small-cap stocks.
The price of the tech-heavy Nasdaq 100 index compared to the small-cap-rich Russell 2000 index has climbed to a multiple of 8.16 — nearing the all-time highs of the dot-com bubble in 2000.
The Invesco QQQ Trust QQQ has delivered an impressive performance, outpacing the Ishares Russell 2000 ETF IWM by a substantial 30% year-to-date in 2023. This indicates a shift in investor sentiment towards large-cap technology stocks.
The reversal of fortune comes after the QQQ trailed behind the IWM by 14% in the previous year.
Nowadays, investors are pondering whether this AI trend will continue or if we are teetering on the brink of irrational exuberance, which could lead to significant market pullbacks.
Nasdaq 100 vs Russell 2000
What's Driving The Trend?
Semiconductors, software, and interactive media services are the primary contributors to the 31% return of the Nasdaq 100 index thus far in 2023.
Stock-wise, four companies accounted for two-thirds of the Nasdaq 100's performance in 2023:
- NVIDIA Corp. NVDA is up 174% year to date
- Microsoft Corp. MSFT is up 38%
- Apple, Inc. AAPL is up 37%
- Meta Platforms, Inc. META is up 117%
The Russell 2000 index, is up just 1% year to date and banks are to blame for the staggering underperformance of small caps relative to tech.
Halozyme Therapeutics, Inc. HALO, Glacier Bancorp. Inc. GBCI, Chegg, Inc. CHGG are the worst contributors to the performance of the Russell 2000 so far in 2023.
Next Up: Cathie Wood Onto 'Next Thing' In AI After ARK's Nvidia Exit: What's On Her Radar?
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