Jonathan Levin: Nasdaq 100 peaked a year ago. Now we know it was a bubble

Use Spotify? Access BizNews podcasts here..Use Apple Podcasts? Access BizNews podcasts here..___STEADY_PAYWALL___.By Jonathan Levin.(Bloomberg Opinion) — If it looks like a bubble, it probably is one. That's the lesson from the Nasdaq 100 Stock Index on the one-year anniversary of its all-time high. In the ensuing 12 months, the tech-heavy benchmark has tumbled 30%, and some of its most high-flying members have lost three-quarters of their value..In retrospect, that shouldn't surprise anyone. A casual glance at the index's multiples in November 2021 would have indicated a remarkable 30 times price-to-forward-earnings multiple, a historical aberration outside of the dot-com bubble of the early 2000s..Of the companies in the index, 22% had forward P/Es above 50, and 26% of the members were trading at greater than 10 times their next 12 months' sales. The index was being sustained by momentum and good storytelling (just a month earlier Facebook had rebranded as Meta to focus the market's attention on the supposed promise of the metaverse). But conspicuously absent from all of it were considerations of near-term cash flows..Of course, that's often what happens when that much money is sloshing around the financial system. It was the final gasp of an unprecedented decade of easy monetary policy, magnified by several rounds of pandemic stimulus checks that left too many dollars chasing too few investments. Tech equities soared alongside cryptocurrencies, used cars, Miami condos and even meme stocks, the clearest embodiment that fundamentals no longer mattered..Clearly, many people knew that the market had become untethered from reality. By the middle of last year, the usual chorus of bubble doomsayers were out in full force with their usual cataclysmic projections. In June, GMO co-founder Jeremy Grantham called it a "classic finale to an 11-year bull market," and economist Nouriel "Dr. Doom" Roubini was warning of a "slow motion train wreck" for the global economy. But as is always the case in bubbles, the momentum was too alluring, and few people wanted to be seen getting out too early..Case in point: The Wall Street sell side. Of 2,927 individual analyst recommendations on Nov. 19, the day of the Nasdaq 100 peak, 1,897 were to buy stocks, 916 were to hold and just 114 were to sell. If the establishment brokerages in New York had heard Grantham and Roubini, they were happy to brush them off as perma-bears and wet blankets..The good news is that Nasdaq 100 valuations look somewhat sane again. At 22 times the next four quarters projected earnings, the index is trading near its average P/E ratio for the past decade. If you believe that interest rates have peaked and that the US will avoid a recession, it's reasonable to contemplate whether the worst may be over for the Nasdaq 100. On the other hand, it's possible that the bizarre conditions of 2020 and 2021 inflated not just the "P" in the Nasdaq's P/E multiple but also the "E," the earnings. If that's the case — and there are good reasons to think so — then the payback for the market's profligacy in 2021 is only half over.

Jonathan Levin: Nasdaq 100 peaked a year ago. Now we know it was a bubble

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