The Stock Market Just Did Something Last Seen in 2020. It Signals a Big Move in the Next Year.

The U.S. stock market had a fantastic second quarter. Investors brushed aside economic uncertainty tied to the Iran war as U.S. corporate profits hit a record high. Financial results were surprisingly strong across every market sector, but technology companies involved in artificial intelligence hardware led the charge.

In turn, while the broad-based S&P 500 (SNPINDEX: ^GSPC) added 15% and the blue chip Dow Jones Industrial Average (DJINDICES: ^DJI) advanced 13%, it was the technology-heavy Nasdaq Composite (NASDAQINDEX: ^IXIC) that delivered a truly impressive performance. The index skyrocketed 21% in Q2 2026 to achieve its best quarterly performance since Q2 2020.

History says this will happen next.

Image source: Getty Images.

The Nasdaq Composite is synonymous with AI growth stocks

The Nasdaq Composite tracks more than 3,300 stocks listed on the Nasdaq Exchange. The index has become synonymous with artificial intelligence (AI) growth stocks due to its technology-heavy composition. Companies in the technology sector account for 61% of the Nasdaq by market value, compared to 38% of the S&P 500.

The Nasdaq's reputation as the premier destination for technology companies, coupled with its less stringent listing requirements and lower fees compared to the New York Stock Exchange, has created a self-reinforcing flywheel. Growth investors gravitate to index funds that track the Nasdaq Composite (or a subset), so technology companies eager to tap that liquidity choose to list their shares on the exchange.

Space Exploration Technologies is a recent example. SpaceX listed shares on the Nasdaq Exchange for its historic IPO. But other companies have actually moved their shares to the exchange since the AI boom began, including Palantir Technologies and Shopify. Beyond that, all seven "Magnificent Seven" stocks trade on the Nasdaq Exchange, as do AI chipmakers AMD, Broadcom, Intel, Micron, and Sandisk.

So what? The artificial intelligence boom began in earnest in January 2023. Since then, the Nasdaq Composite has risen 147%, while the S&P 500 has risen 95%. The Nasdaq's technology-centric composition explains why it outperformed by 52 percentage points and why the index may continue to perform well as the AI boom unfolds.

History says the Nasdaq Composite could soar 24% in the next year

As mentioned, the Nasdaq Composite went up 21% in Q2 2026, marking its best quarterly performance since Q2 2020, when it soared 31% as investors piled into technology stocks aligned with the digital transformation theme popularized by the COVID-19 pandemic.

Excluding the most recent incident, there have been six quarters during the last 15 years in which the Nasdaq Composite advanced at least 15%. The index has historically performed very well following those events, as shown in the table.

Data source: YCharts.

As shown, following quarterly gains of at least 15%, the Nasdaq has returned an average of 22% during the next 12 months. Past performance is never a guarantee of future results, but we can use that data to make an educated guess about what the index might do in the next year.

The Nasdaq Composite closed at 26,214 when the second quarter ended on June 30. The index will climb 22% to hit 31,981 by July 2027 if its performance matches the historical average. That implies nearly 24% upside from its current level of 25,832 as of July 2.

Investors can get exposure to the Nasdaq Composite with the Fidelity Nasdaq Composite ETF (NASDAQ: ONEQ). Alternatively, investors can gain exposure to the Nasdaq-100 (which tracks the 100 largest nonfinancial companies in the Nasdaq Composite) through the Invesco QQQ Trust (NASDAQ: QQQ).

Personally, I would choose the Invesco QQQ Trust because it is more heavily traded and has a lower expense ratio (i.e., 0.18% vs. 0.21%), but both index funds should benefit as the AI boom continues to unfold.

Trevor Jennewine has positions in Palantir Technologies and Shopify. The Motley Fool has positions in and recommends Advanced Micro Devices, Broadcom, Intel, Micron Technology, Palantir Technologies, and Shopify. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.