Large- and mega-cap growth stocks were out of fashion in a big way last year, but it took just a few weeks into 2023 for that trend to reverse.
How long large- and mega-cap growth equities will strut their stuff this year remains to be seen, but it’s clear first-quarter momentum displayed by those stocks is bolstering exchange traded funds such as the Invesco QQQ Trust (QQQ) and the Invesco NASDAQ 100 ETF (QQQM).
Two of the marquee options among mega-cap growth ETFs, QQQ and QQQM are both higher by 20% year-to-date. Both ETFs track the Nasdaq-100 Index (NDX) and that’s noteworthy because this year, that index is rejecting historical precedent — and that’s a positive for investors.
“Historically, the Nasdaq 100 has been modestly more volatile than the broader market. With equity volatility rising, this market segment should have underperformed. Why the resilience?,” noted BlackRock. “One explanation: Investor fears have rapidly shifted back to a potential recession. Under this scenario, investors tend to prefer highly profitable, cash-flow rich companies. That most of these companies tend to have low leverage and are less dependent on debt financing is an added benefit.”
One of the reasons — and an obvious one at that — QQQ and QQQM are surging this year is the expectation that the Federal Reserve is nearing the end of its tightening cycle. Rising interest rates punished the ETFs last year as the future cash flows of growth companies became less attractive when measured against high-yielding Treasuries.
“A sharp drop in real rates has typically benefited tech and growth names, but the relationship has grown stronger in recent years. Monthly changes in real rates have historically explained about 6% of the relative performance of mega-cap tech. However, looking at the last three years of data the explanatory power has risen to more than 25%! The strength of the relationship was on full display last year as the backup in real rates trashed both early and mature growth stocks. The recent reversal in real rates has played a large part in putting the bid back into mega-cap growth names,” added BlackRock.
Sector attribution is also helping QQQ and QQQM rise to the occasion this year. Through the end of the first quarter, the three best-performing sectors in the S&P 500 were technology, communication services, and consumer discretionary. Those groups combine for over 80% of the QQQ and QQQM portfolios.
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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.
