NASDAQ vs S&P 500: Understanding Their Correlation for Better Stock Market Investing

The NASDAQ 100 and the S&P 500 are the two essential pillars of the American stock market. Yet, despite their apparent similarity, they have notable differences in terms of composition, volatility, and investment strategy. Deciphering their correlation helps refine stock market choices and optimize your portfolio.

Correlation between NASDAQ and S&P 500: What is it?

Stock correlation measures how much two assets move in the same direction. On a scale from -1 to +1:

+1 = perfect correlation (the assets always move together)
0 = no connection
-1 = inverse correlation (one rises, the other falls)

NASDAQ/S&P 500: A Strong and Persistent Correlation

Since the 2000s, the correlation coefficient between the two indices has fluctuated between 0.70 and 0.95.
This correlation has been reinforced since 2020, due to the increasing dominance of tech stocks (with the GAFAM leading).
During periods of crisis or economic recovery, macroeconomic forces (interest rates, inflation, monetary policy) simultaneously influence both indices.

Composition: Tech Concentration vs. Sector Diversification

NASDAQ 100: An Index Highly Exposed to Tech

The NASDAQ 100 brings together the 100 largest non-financial companies listed on the NASDAQ.
More than 50% of its weighting is dedicated to the technology sector.
The top 10 capitalizations alone represent more than 45% of the index (Apple, Microsoft, Nvidia, Amazon, Meta…).

Consequence: spectacular outperformance during tech booms, but also greater sensitivity to downturns.

S&P 500: A More Balanced, General Index

The S&P 500 consists of 503 major companies spanning 11 sectors: healthcare, finance, energy, industry, consumer, etc.
Technology represents about 28% of the index.

Consequence: more resilient when facing sector rotations or targeted crises.

Volatility: A Key Criterion for Choosing Between NASDAQ and S&P

NASDAQ, the Champion of Swings

Average volatility over 20 years: about 20% for NASDAQ, compared to 12% for S&P 500.
Example: In March 2020, the NASDAQ dropped by more than 30% in one month before rebounding by +80%.

S&P 500, a Shield of Diversification

It better absorbs macroeconomic or sector shocks.
Example: In 2022, the S&P 500 resisted interest rate hikes better than the NASDAQ.

Long-Term Performance

Why This Correlation Matters for Investors

For Traders:

Identify phases of temporary decorrelation to anticipate sector rotations.
Use NASDAQ as a leading indicator during tech booms.
Limit losses with the S&P 500 in times of uncertainty.

For Long-Term Investors:

Diversifying between the two helps smooth overall performance.
An intelligent allocation (e.g., 60% S&P / 40% NASDAQ) optimizes the risk/return ratio.

In Summary: Which Index for Which Profile?

NASDAQ / S&P 500 Correlation, a Strategic Tool

Even if they seem similar, the NASDAQ 100 and S&P 500 follow different logics. Their high correlation reflects common drivers, but their risk behavior and sector structure differ greatly.

By understanding this correlation, you can:
better manage your exposure to risk
calibrate your portfolio for your profile
benefit from macroeconomic trends

Ludovic Bertola
August 29, 2025