Will the NASDAQ Reach Another High?

With the Dow and S&P 500 celebrating all-time highs, the tech-heavy index is the odd man out. It might take a decade to regain its former peak

With the Dow Jones industrial average briefly topping a record-breaking 14,000 on July 16, and the S&P 500 and other indexes also near their all-time best levels, the NASDAQ composite index must be feeling pretty lonely. While its blue-chip counterparts breathe the rarefied air of record territory, the tech-heavy index still needs to rise 87% to hit its March, 2000, record high of 5,048.62.

That's not because tech stocks have been lagging way behind the rest of the economy lately. The NASDAQ is at a six-and-a-half year high, after all.

The problem is that tech stock prices got so high to begin with. The NASDAQ far outpaced the Dow and the S&P 500-stock index in the bull market of the late 1990s and early 2000. "It just got to crazy levels," says Manny Weintraub, president of Integre Advisors.

Waiting for a "Revolutionary Idea"

Is a new record anywhere in sight? Market experts said making a firm prediction would put them out on a very shaky limb. That's because a NASDAQ record could be several years, possibly more than a decade, down the road. Of course, the NASDAQ could once again surprise investors.

Neil Hennessy, the president and investment manager of the Hennessy Funds, says tech stocks often move in spurts, propelled by big leaps forward in technology. In the early 1980s, a bull market for tech was fueled by faster microchips and the desktop computer. Then, tech stocks stayed quiet until 1994, when the Internet boom began.

For the NASDAQ to hit a new record, a "revolutionary idea" needs to come along, Hennessy says. That new technology must "change the way we do business and live our daily lives," he says. Apple's (AAPL) iPod, for all its promise, "isn't going to do it."

Or Another Bubble

There are plenty of good signs for the NASDAQ and for tech stocks. Sectors, including telecom, that really suffered in 2000 and 2001 have revived (see BusinessWeek.com, 6/27/07, "Telecom: Back from the Dead").

Brian Reynolds, chief market strategist at M.S. Howells, says there are two ways the NASDAQ could climb back to 2000 levels. First, the index could "gradually move to a new high over a period of many, many years." At a 7% annual growth rate, it could take a decade.

The second way NASDAQ hits a new high: "The general public becomes infatuated with stocks again, in a repeat of the bubble," Reynolds says. In other words, retail investors jump on the tech bandwagon again, pushing stock prices to ridiculous price-earnings ratios. Weintraub believes that's unlikely, at least until many of the current market participants get old and retire. "The market has learned a lesson," he says. "Retail investors have learned a lesson."

The Hard Way Up

Tech stocks must make up for the huge price-to-earnings multiples investors were willing to pay in early 2000. Since investors will not again pay 80 or 90 times earnings, the only way to reach 2000 levels is to grow earnings several times, says Douglas Peta, market strategist at J. & W. Seligman. That could take a while.

"The market lost its collective sense at the end of the '90s," Peta says. "Technological products may well effect a big change in our lives. They did not change the laws of valuation and economics. Now we've learned that lesson."

Before it's here, it's on the Bloomberg Terminal.