Valuation on the Nasdaq 100 has reached 18x on EV/EBITDA which is now the highest level since February 2004 and much higher than the global equity market. But is it necessarily a problem? Investors that bought Nasdaq 100 in February 2004 at these high valuations would have got 10.4% annualized return in the subsequent 10 years despite the valuation multiple declining as EBITDA rose 14.5% annualized during this period. If the Fed introduces yield-curve control this year (read our analysis from yesterday on what it means for equities) our best guess is that it will cause a valuation multiple expansion for growth stocks which includes Nasdaq 100. This means that even with a lower EBITDA growth rate over the coming years the Nasdaq 100 could sustain its trend.
In short-term we recommend investors to use technical indicators to decide whether to stay in technology or not. Our view is that there are still so many unknowns related to the economy from the COVID-19 outbreak that investors should still stay cautious as things can change on a dime. Our preferred indicator since the rebound in March has been the 15-day moving average. As long as Nasdaq 100 is above sentiment warrants a positive view on US technology stocks.