Introduction:
NASDAQ index is made up of industrial, healthcare, media, technology, telecommunication and service companies. The biggest companies in US which had listed in the stock exchange when it was incorporated are the main composers of this index. It consists of both local and multi-national companies.
1. Suppose the NASDAQ index increase by 7 percent annually over the next decade while the S&P 500 increases 6 percent annually, on average you are better off holding the NASDAQ stocks than the S&P 500 stocks. On average are you better off holding the NASDAQ stocks than the S&P 500 stocks because S&P 500 index which is normally updated and maintained by the standard & poor’s consists of the largest 500 corporations in the US which represent the largest composition in the index since the index is calculated using the total capital market capitalization. Thus it is a representative of all companies in the economy including those in the financial sector which are volatile and the value of their stocks is usually affected by the prevailing economic conditions compared to the NASDAQ stock index which is composed of the largest 100 corporations which are purely selected from the other sectors of the industry apart from the financial sector which is volatile and severe economic conditions and inflation would adversely affect its value of stocks. For example the effects of economic depression in 2008. (Paul, 2009)
2. The high inflation rates of 1970 caused the economic conditions of the US to deteriorate and hence P/E ratios depressed. Earnings per share were minimal. From 1980’s the economic picked up and together with the stock market boom of early 1990’s, the P/E ratios consequently rose . However, the stock market bubble busted out in late 2000 and the economic conditions of the US deteriorated causing a depression in the P/E ratios.
3. I have an opinion that the share of S&P 500 is overvalued in relation to its normal P/E ratio. This is because their values are higher than the normal price earnings ranges although when you compare the earnings of 2009, you will realize that the P/E ratios went down due to the great economic crisis of the year2008 but the way P/E ratios rose in the subsequent years, it was beyond the normal ranges. Even when you look back you will realize that the P/E ratios have always been a little bit higher than or lower than the normal range although in some few cases they move beyond the range. For example during the great economic crisis of 2008, the P/E ratios depressed beyond the undervalue range of 10 while the stock market booms of late 1990’s ,they went beyond the overvalue range of 20. On average, the ratios have mostly hovered at slightly beyond 16 which shows that the stocks are overvalued since there is substantial evidence that earnings will continue rising
4. General motors company P/E for the year 2012 is shown as 5.3 despite the fact that it recorded the largest profit of about $7.66 Billion while that of Microsoft by June 2012 was 43.GM has the government of US as its largest shareholder after it helped the company out of financial crisis in 2010 thus this profits could not stir any positive reactions from investors which would increase the value of shares and consequently the P/E ratio. Also, the highest ratio of the of Microsoft was highly contributed by the fact that companies in the technology industry are growing and experiencing high profits
References
Krugman, P. (2009). The Return of Depression Economics and the Crisis of 2008.
NASDAQ. (" December 20, 2011 (NASDAQ:EA)). "Electronic Arts to Change Nasdaq Ticker Symbol.
Pinto, J. E., Henry, E., Robinson, T. R., & Stowe, J. D. (2010). Equity Asset Valuation. .
Shawn. (2006). "Welcome to the Dead Zone". Fortune. "Danger Zones", and "Safe Havens".
