What the NASDAQ PE means

I like tech as a sector to invest in. It has good growth potential, running costs are often low and businesses have a global audience. The recent meteoric rise in tech stocks has me worried though, and I’ve been thinking we may be due a market correction soon.

Nasdaq 100’s price earnings ratio for the past ten years has been an average of 22, while currently it sits at 36. For tech to fall back within its normal range, it would require tech companies to have at least three years of 20% annual earning growth.

This gives us two possibilities. Either the markets believe we are moving towards a more digitally connected world, where tech plays a bigger role and their valuations are indeed representative of their value to society, or we have a market which is overvalued and is due a correction.

With this said, in a world where we return back to normality, habits formed now could shape future interactions with technology (think online purchasing and groceries being normalised). For now, I’ll be keeping a lookout on how consumers and industries continue to apply tech, and whether the elevated use is as high once the good times return

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