Capital Market Impact

After the recent run-up, a good time to diversify

June 14, 2023
A professional having a meeting with two clients.

The NASDAQ 100® Index is currently on a six-week run of gains, largely thanks to the performance of a few mega-cap technology stocks that rule the Nasdaq exchange. This Index, which tracks the performance of the top 100 stocks in the NASDAQ Composite Index, is off to one of its strongest starts since the 1990s, with a year-to-date return of around 33%. As of June 9, the NASDAQ 100 is approximately 13% away from its all-time high, last seen in November 2021. The allure and transformational potential of artificial intelligence (AI) has captured many investors’ imagination, and they have, in turn, piled into large-cap tech shares. But it’s not purely a momentum play; investors have shown an inclination toward well-established companies with solid balance sheets and reliable growth prospects.

Chart on Price/Earnings (P/E) ratio relative to the S&P 500® Index (June 30, 2003 to June 6, 2023).

Clients participating in this year’s tech-stock rally could benefit from a portfolio review and diversification check, as this appreciation may have thrown many allocations off balance. Investors may find opportunities at more reasonable valuations when comparing different asset classes across the market. For example, small caps have lagged the NASDAQ 100 this year, with the Russell 2000® Index of small-cap stocks down nearly 10% year. Over the past three months, the Russell 2000 has trailed the NASDAQ 100 by about 22% – one of the most significant gaps in performance outside of major disruptions like the COVID pandemic and the dot-com crash of 2000.

In the last few trading days, however, there’s been some shift in this trend, with small caps outperforming the mega-cap tech-led NASDAQ 100 Index. This could be an interesting development, with the potential for improving market breadth and an opportunity for investors to gain from the catch-up trade. Investors reviewing their portfolio allocations may want to consider locking in gains from any appreciation in tech stocks and look for new opportunities in the more undervalued market segments such as small caps.


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