There is a notable trend in the Nasdaq 100 that has caught my attention recently. Even though the index is trading near all-time highs, there has been a significant decline in forward-looking valuations. The forward P/E ratio for the Nasdaq 100, which stood at 24.28, has now retreated to 21.35—a decline of approximately 12.1%.

What is particularly significant here is that the valuation of these companies—relative to their expected earnings—is falling even as the Nasdaq continues to climb. Under normal circumstances, one would expect P/E multiples to rise when share prices increase, assuming earnings expectations remain constant. However, we are seeing something different: the earnings expectations for the next 12 months are growing at a faster pace than the index itself.

The impact of artificial intelligence (AI) investments on corporate financials plays a key role in this dynamic. While these investments initially bolstered the revenues of chipmakers, their influence has since broadened to encompass a much wider spectrum—from memory manufacturers and optical interconnects to networking equipment and data center infrastructure. Furthermore, supply constraints in certain areas, combined with robust demand, have enhanced companies' pricing power and helped support their profit margins.

Another critical factor is the level of U.S. Treasury yields. Generally, high interest rates tend to exert downward pressure on valuations, particularly for growth-oriented companies. The fact that the Nasdaq has remained resilient despite this underscores the market's strong focus on future earnings growth. However, it is important to keep in mind that any further rise in interest rates could once again exert pressure on valuation multiples.

Naturally, one must also consider the composition of the Nasdaq 100. A significant portion of the index is weighted toward a few large technology companies. Consequently, strong growth in the earnings expectations for these firms could drive the index’s overall forward price-to-earnings (P/E) multiple downward. Therefore, a decline in the index’s valuation does not necessarily mean that all companies have become cheaper to the same extent.

Another point to consider is that the forward P/E ratio is calculated based on expectations for the next 12 months, rather than on realized earnings. In other words, the current multiple of 21.35 rests on the assumption that companies will meet their projected earnings. If, in upcoming reporting periods, companies continue to deliver strong results and raise their future earnings forecasts, valuations could remain at current levels even as the index itself rises. Conversely, if downward revisions to earnings estimates begin to emerge, this picture could change.

Thus, it would be inaccurate to conclude that the market is more expensive than in the past simply because the Nasdaq is trading near its all-time highs. The fact that the index’s multiple has retreated from 24.28—where it stood at the end of 2025—to its current level of 21.35 is significant; however, this does not, by itself, imply that the market is "cheap."

In the coming reporting periods, what I will be watching closely is not just whether companies beat expectations, but the extent to which they raise their revenue and earnings guidance for 2027. This is because the sustainability of current valuations depends, to a large degree, on the continuation of this robust earnings growth. In short, evaluating the rise of the Nasdaq solely by looking at the index's price is insufficient. What truly matters is the earnings growth behind this rise and the extent to which this growth is sustainable.