A correction in the Nasdaq 100 has been expected for quite some time, and it looks like this week will usher in one.
Nvidia shares – which are overvalued to the sky – triggered the decline in the entire sector. Another major reason is the end of the quarter, it is natural for traders to pocket some of the accumulated profits, which equates to $430 billion in the last three days.
Despite falling nearly 7% on Monday, Nvidia shares are still heavily overvalued. The company is currently valued at $2.9 trillion. Given that net income in fiscal 2024 is around $30 billion, investors are still willing to pay a staggering $97 for every dollar of profit the company generates. However, a rebalancing of positions at the end of Q2 could lead to a deeper correction at Nvidia. Given that the company represents nearly 8% of the Nasdaq, it only makes sense that the broader index would also be affected by some volatility.
Markets are a voting machine in the short term, but a scale in the long term.
Nasdaq’s fair value — using the time-tested earnings and dividend growth rate — is just $13,082. So, despite the coming correction, there is a huge gap between what the basket of companies is actually worth and how much traders are willing to pay. This difference is a staggering 49% – this seems like optimism on steroids and a slight cooling is perfectly logical and healthy for the sector.
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