Question

Based on your review of the Bloomberg Market Concepts (BMC), explain i) how the Nasdaq Composite index and its P/E ratio changed during the past 20 years, and ii) why most investors think there was a bubble in the valuation of technology stocks 20 years ago but not now. Answer: i)

Answer 1

I) Nasdaq composite index and its price to earning ratios has changed dramatically since past 20 years as it has went through two of the biggest downfalls when the technology bubble burst in 1999 and when there was a great recession in 2008 so there was a change in the composition of the index and there were always new leaders found for the Bull run as previous leaders were completely shattered and they would not able to recover their previous highs. At the time of the bubble Nasdaq was trading at unimaginable valuations and it was not likely to sustain so it can be said that there was a different kind of exuberant buying in which investors were buying at any price because they feared that they will miss out the really.

b). There was a bubble in 1999 because most of the stocks were trading at such unimaginable price-to-earnings that it would never have sustained because the results were very poor of those companies and it was just running up because people thought that it was a technology stock.

it is different in current scenario because only few of the leaders are performing and they are reporting better than ever profits and their growth trajectory is also magnificent and they are expected to continue their leadership in the particular sector.