Does the Nasdaq Composite Still Have Room to Run?

Over the past couple of years, investors have rushed to get in on the next big thing in technology: artificial intelligence (AI). To do this, they've piled into shares of companies developing or using AI, and this movement has benefited the tech-heavy Nasdaq Composite (NASDAQINDEX: ^IXIC). The benchmark soared 84% from the start of 2023 through the end of last year.

But, earlier this year, investor concerns about the impact of President Donald Trump's import tariffs on the economy halted that momentum, and the Nasdaq slid into bear territory. In recent weeks, though, investors have become more optimistic about growth amid certain encouraging signs -- for example, the U.S. reached an initial trade deal with China at lower-then-expected tariff levels.

As a result, the Nasdaq has rebounded, erasing this year's losses and trading near its record high. Now, the question is, from here, does the Nasdaq still have room to run? Let's find out.

Image source: Getty Images.

AI stocks have driven gains

First, let's take a step back and consider the AI movement that drove the Nasdaq gains of the past two years. Companies producing crucial AI development tools, like chip designer Nvidia (NASDAQ: NVDA) and networking giant Broadcom, advanced, as did players using these AI products to build out infrastructure -- and here a good example is Meta Platforms, a company that plans as much as $72 billion in capital spending this year.

These and other players involved in AI helped the Nasdaq gallop higher, reaching new record highs multiple times.

To answer our question regarding the Nasdaq's potential for gains from its current level, it's key to look at two things: the element that could power share momentum and the index's historical performance. We'll start with the possible catalyst. That continues to be AI, and it's joined by another exciting technology: quantum computing, with pure play companies like Rigetti Computing or larger tech giants such as Alphabet developing such programs.

Though AI has driven significant gains in corporate revenue and share prices in recent years, we're actually in the early days of this technology's story. Analysts expect the market, at a compound annual growth rate of 30%, to reach more than $2 trillion in less than 10 years. We should keep in mind that the AI buildout is far from over -- and the actual application of AI to real world problems may drive many years of growth for AI companies.

Quantum computing, too, is in its early stages, and progress in the field has resulted in gains for the tech companies involved -- and, as a result, the Nasdaq too. This technology involves the use of quantum mechanics to solve problems today's computers are unable to handle.

What history tells us about Nasdaq performance

Now, a quick look at what history has to say about the Nasdaq. As you can see in the following chart, the Nasdaq over time always has gone on to reach new highs -- it's never halted at a certain level and remained permanently lower.

^IXIC data by YCharts

So, the potential of the AI and quantum computing stories along with the index's historical behavior suggest that, from today's level, it has plenty of room to run. How can you benefit from this? In a couple of different ways. You could select a variety of quality Nasdaq stocks that today trade at a discount compared to their average valuations over the past couple of years. Nvidia, trading at 33 times forward earnings estimates, is a good example -- over most of the past year, it's traded above 40 times these estimates.

You also might consider a fund -- such as the Fidelity Nasdaq Composite ETF (NASDAQ: ONEQ) -- that tracks the index's performance. These exchange-traded funds trade daily just like a stock, making it easy to add them to your portfolio.

Another option is hand-picking a few Nasdaq stocks and investing in an ETF that tracks the index too, so you can potentially benefit directly from certain players and also gain broad exposure to the entire benchmark.

Importantly, no matter which option you choose, get ready to hold on for at least five years. Long-term investing offers companies and indexes time to manage difficult environments and excel during better times -- and that could equal a big investing win for you over the long run as the Nasdaq still has plenty of room to run.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Meta Platforms, and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.