Three of the Magnificent 7 stocks - AAPL, MSFT, and META- all had pocket pivots on Fri March 21. Market Direction Model was still on a CASH signal due to uncertainty in terms of which way markets may swing after a period of volatility. Quadruple witching on Fri added to the noise and artificially boosted volume. The same could be said for AAPL, MSFT, and META. That said, the movement of the NASDAQ Composite and Magnificent 7 which make up about a 40% weighting in the index (and a 35% weighting in the S&P 500) highly correlate. Where either goes, so goes the other.
The risks of the current bounce rolling over and the downtrend continuing depend on:
1) whether GDP and its revisions materially comes in under estimates when eventually leads to recession as defined by two negative quarters of GDP,
2) inflation accelerates above expectations prompting the Fed to hike rates, or
3) unemployment soars as it has done in past recessions.
So far, none of these data points are showing red flags. Powell has already said the Fed will regard any inflation due to the tariffs as transitory. With the Fed adopting an easier money approach with QT (quantitative tightening) being lowered from $25 bil to $5 bil/mo as well as more rate cuts on the way, global liquidity has been getting another boost. We also have ISM manufacturing as a leading indicator as discussed in prior reports which global liquidity tends to follow.
Therefore, this bounce has a higher likelihood, since the market is all about probabilities, of trending higher overall until the data show otherwise. We have a GDP revision out this Thursday at 830 am ET as well as the Fed's preferred measure of inflation, the PCE, out on Friday at 830 am ET.
Nasdaq Composite Valuation Analysis: 2025 vs. Dot-Com Bubble
As of March 2025, the Nasdaq Composite index stands at historically high levels, prompting comparisons to the dot-com bubble of 1999-2000. While today's market shows signs of overvaluation, it does not exhibit the extreme speculative nature seen in 1999-2000.
| Metric | Dot-Com Bubble (2000) | Current (March 2025) |
|---|---|---|
| PE Ratio | ~200 (NASDAQ Composite) | 32.84 (NASDAQ 100) |
| Long-Term PE Average | N/A | 23.87 |
| Price Level | 5,048.62 (peak) | ~17,691.63 |
| Market Cap/GDP | Extreme speculative bubble | Elevated but earnings-backed |
Key Differences
1. Earnings Foundation
1999-2000: Many companies had no profits or revenue (e.g., Pets.com, Webvan). Valuations were driven by speculation about future internet potential.
2025: Dominated by profitable tech giants (AMZN, AAPL, MSFT, META, GOOGL, NVDA) with proven business models and strong cash flows.
2. Growth Rational
1999-2000: "Get big fast" mentality prioritized user growth over profitability. Companies merely adding .com to their names often doubled overnight.
2025: AI, cloud computing, and digital transformation drive revenue growth (e.g., Microsoft's Azure grew 28% YoY in 2024).
3. Interest Rate Environment
1999-2000: Fed raised rates to 6.5% to combat inflation after having lowered them to deal with Y2K fears prior to 2000, bursting the bubble.
2025: Rates remain elevated (~5.25%) but are expected to stabilize or decline, supporting valuations.
Concentration Risk
The "Magnificent 7" (AAPL, MSFT, GOOGL, AMZN, NVDA, META, TSLA) account for approximately 40% of the Nasdaq Composite's weighting. This concentration presents both opportunities and risks:
Opportunity: These companies have strong financials and leading positions in growth sectors. Strength begets strengths.
Risk: Any significant downturn in these stocks could disproportionately affect the index.
AI and Technological Advancements
While there are some parallels to dot-com era hype around AI, key differences exist:
AI applications are already generating substantial revenue (e.g., NVDA's data center sales up 409% YoY in Q4 2024). Individuals, companies, and governments are materially boosting their levels of productivity.
In consequence, major tech companies are investing heavily in AI R&D with clear paths to monetization. AI might end up like the transistor, a big discovery that scales well and seeps into every corner of the economy.