The Nasdaq Just Had Its Worst Month Since March. History Says the Stock Market Will Do This Next.

The Nasdaq Composite (NASDAQINDEX: ^IXIC) dropped 1.5% in November, marking the first time the technology-heavy index has suffered a monthly loss since falling 8.2% in March. Investors are concerned about elevated valuations as some experts believe the artificial intelligence trade has created a stock market bubble.

Nevertheless, the Nasdaq Composite recently entered a new bull market and history says the index is headed much higher over the next few years.

Image source: Getty Images.

The Nasdaq dropped into a bear market earlier this year

The Nasdaq Composite is one of three major U.S. stock market indexes. The other two, the S&P 500 (SNPINDEX: ^GSPC) and the Dow Jones Industrial Average (DJINDICES: ^DJI), are seen as gauges for the entire domestic equities market and blue chip stocks, respectively. The Nasdaq Composite is seen as a gauge for growth stocks due to its heavy concentration in the technology sector.

The Nasdaq topped 20,000 for the first time in December 2024, then dropped sharply when President Trump began imposing tariffs soon after his inauguration. The losses accelerated when Trump not only announced a baseline global tariff, but also severe reciprocal tariffs on most countries in early April. The Nasdaq slipped into a bear market and bottomed out at 24% below its record high on April 8.

In hindsight, that low point actually marked the onset of a new bull market, the seventh Nasdaq bull market since 1990. And historically speaking, we are still in the early stages of that bull market.

History says the Nasdaq bull market is just getting started

The term bull market usually refers to a situation in which a stock market index has (1) returned 20% from the previous bear market low and (2) attained a new record high. To elaborate, the beginning of the bull market is defined as the low point of the prior bear market, but the bull market is not considered official until the index satisfies those two conditions.

By that definition, the Nasdaq entered a new bull market when it reached bottom on April 8, and that bull market became official when the index attained a new record high in late June. Past performance is never a guarantee of future results, but we can analyze bull markets from years past to make an educated guess about how the index will perform in the future. The chart below provides details.

Chart created by Author. Data source: YCharts.

As shown above, the Nasdaq returned an average of 281% during the last six bull markets, and it achieved those returns over an average of 1,817 days (about five years). That means the index has returned 31% annually during bull markets since 1990.

Investors can infer two points from that information. First, the Nasdaq has advanced 53% since the bull market started on April 8. So, if its performance aligns with the historical average, the index will add another 228% before the current bull market ends.

Second, about 235 days have elapsed since the Nasdaq entered a new bull market. If the duration matches the historical average, the current bull market will continue for another four years and four months (more or less).

The current bull market may not fit the historical pattern

History says the Nasdaq Composite will return approximately 31% annually over the next four-plus years. However, the current bull market may not fit the historical pattern because valuations are abnormally high.

The Nasdaq-100 -- which includes the top 100 non-financial stocks in the broader Nasdaq Composite -- currently trades at 35 times earnings. That is a substantial premium to the 10-year average of 26 times earnings. In fact, excluding the past year, the Nasdaq-100 has not traded at 35 times earnings in March 2004.

Admittedly, valuation is a poor predictor of near-term returns in the stock market, but the market is on edge because signs of economic weakness have emerged since President Trump began imposing tariffs. If the economy continues to struggle in the coming months, the Nasdaq bull market may come to an early end and the index could slip back into bear market territory. Investors should be particularly conscientious about valuations when buying stocks in the current market environment.

Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.