For Growth Stocks, ETFs, Fed Looms Large | ETF Trends

Growth stocks, namely technology and communication services fare, were among the primary drivers of broader market upside in the first quarter.

That rising tide lifted many boats, including the Invesco QQQ Trust (QQQ) and the Invesco NASDAQ 100 ETF (QQQM). Those exchange traded funds and other growth-heavy funds traded modestly lower last week amid fears that technology sector earnings could damp growth stocks’ momentum.

On the other hand, some market observers believe tech earnings season won’t be the drag some investors are wagering it will be. If accurate, that thesis could imply good news, or at least limited bad news, ahead for ETFs such as QQQ and QQQM.

That thesis will be tested imminently as Google parent Alphabet (NASDAQ: GOOG), Microsoft (NASDAQ: MSFT), Facebook parent Meta Platforms (NASDAQ: META), and Amazon (NASDAQ: AMZN) all step into the earnings confessional this week. Combined, that quartet of stocks represents 30.27% of the QQQ and QQQM rosters.

Of course, earnings are just one part of the equation for any stock, growth names included. Federal Reserve policy also looms and that’s particularly important to market participants evaluating QQQ and QQQM because, as was displayed last year, growth stocks are rate-sensitive.

“The companies that have been leading the stock market this year are mainly high-growth technology stocks and communication services sector stocks. These stocks tend to be sensitive to changes in interest rates, and the building expectations that the Federal Reserve will be cutting rates in the second half of this year have helped buoy the group,” wrote Morningstar analyst Lauren Solberg.

The Federal Open Market Committee (FOMC) meets in early May and it’s widely expected that another rate hike of 25 basis points will be unveiled. That’s arguably baked into the share prices of many QQQ and QQQM components.

What potentially matters more than a 0.25% rate increase is the Fed articulating to market participants that it’s close to ending its tightening regime. If such commentary emerges, it could provide investors with a reason to boost growth stock allocations.

“Interest rates have been a big driver of the large-cap sector. Last year, in a world where many central banks were raising interest rates, both stocks and bonds were down in double-digit territory. Much of what was driving the tech-sector losses was the rapid repricing of interest rates,” Gargi Chaudhuri, head of iShares Investment Strategy at BlackRock, told Morningstar.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.