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The tech-focused Nasdaq Composite index has shot up recently. Since its lows in April it has risen about 55%, and since the start of 2023 it has jumped about 125%.
Could we be looking at a sharp pullback after these explosive gains? Let’s discuss.
Astonishing returns
Over the last three years, the Nasdaq has delivered annualised gains of around 30%. That’s an incredible return.
Now, at the end of 1998, about 15 months before the dotcom crash, the index was showing similar kinds of returns. So, that’s a bit concerning.
But here’s the thing. In 1999, the index rose a whopping 85%.
In other words, there was a huge move higher (a ‘blow-off top’) right before the rally came to an end. This suggests that there could potentially be more gains to come before this rally ends.
Is this the 90s again?
Of course, while this rally could play out like the rally of the late 1990s, it may not. There are a few key differences between now and then.
For a start, tech valuations aren’t outrageously high (in general) like they were in the late 1990s. Sure, there are some stocks that look a bit detached from their fundamentals like Tesla and Palantir, which trade on price-to-earnings (P/E) ratios of 259 and 287, respectively. But other stocks look quite reasonably priced. Alphabet, for example, currently trades on a P/E ratio of 25. Amazon is on 34 – near a historical low.
Second, most of the most popular stocks today (think the Magnificent 7) have diversified operations, tons of cash flow, and strong balance sheets. Back in the late 1990s, it wasn’t like this – many of the most high-profile names were companies with minimal revenues that went on to go bankrupt (such as pets.com, eToys.com).
Prone to sharp pullbacks
One thing I will say, however, is that the Nasdaq does tend to experience sharp pullbacks on a regular basis. We saw them in 2018, 2022, and the first half of 2025.
Ultimately, volatility is the price of admission with this index. It has a fantastic long-term track record, but it is prone to meltdowns at times.
Managing risk
Given its history, it’s worth thinking about risk management. One doesn’t want to be overexposed to the index or the stocks in it.
One way investors could potentially manage risk is by allocating some capital to non-tech ETFs. These products could provide portfolio protection if tech stocks suddenly plummet.
A product that could be worth considering is the Xtrackers MSCI World Health Care UCITS ETF (LSE: XDWH). This provides broad exposure to the Healthcare sector.
There are a few reasons I’ve highlighted this ETF in particular. First, healthcare is a defensive sector and relatively uncorrelated to technology. If tech stocks experience weakness, capital could flow into this sector.
Second, it offers exposure to some great companies. Top holdings include the likes of Eli Lilly, Johnson & Johnson and AstraZeneca.
Third, it has a great long-term track record. It also has low fees.
Finally, healthcare stocks are out of favour right now. As a result, many look cheap.
Now, there’s no guarantee that this ETF will do well in the near term, of course. The healthcare industry is facing some challenges today due to US regulation.
I see plenty of potential in the long run, however. So, I think it’s worth a look.
