In financial markets, many say that nothing moves up in a straight line. That saying is accurate, durable over time and currently applicable to the high-flying communication services and tech sectors.
Take the case of the Nasdaq-100 Index (NDX), which allocates heavily to those two groups. That benchmark, tracked by exchange traded funds such as the Invesco QQQ Trust (QQQ) and the Invesco NASDAQ 100 ETF (QQQM), is trouncing the S&P 500 year-to-date. It’s also lower by 4.32% for the month ending Aug. 24.
Pullback seems sensible. Earlier this year, some members of the QQQ and QQQM portfolios possibly got ahead of themselves. Pullbacks occur. Still, they shouldn’t be impetus for long-term investors to leave potential-rich positions; they can be healthy, even.
Speaking of Long-Term…
Some advisors talk of another tech bubble. The rise of the artificial intelligence (AI) investing theme fuels this one, but it’s worth noting that NASDAQ is still below its 2022 highs. So even when accounting for NDX’s 2023 bullishness, the bubble chatter may be hyperbole. There are other factors for QQQ and QQQM investors to consider.
“It is essential to distinguish between companies that benefit from technological megatrends in the long run and those that have merely been swept to the surface by the latest tech wave,” noted Pamela Hegarty of BNP Paribas. “The key is to recognise the fundamental drivers that are unaffected by hypes. One such factor is the dynamic development of the semiconductor industry and, yes, AI (Artificial Intelligence) is a factor here too.”
Regarding long-term perspectives, Hegarty highlighted the case of semiconductors. These are pertinent to market participants evaluating QQQ and QQQM because the ETFs are heavy on chip equities. Currently, demand for personal computer and smartphones — two key end markets for chips — is slack. Still, that won’t be the case forever. Plus, other industries can pick up the slack.
“Longer term, the main driver of increased demand for microchips is the digital transformation,” added Hegarty. “Semiconductors are a fundamental technology for cloud applications, automation and the Internet of Things. They are used in products ranging from large computers and smartphones to diversified industrial, car and high-performance products.”
AI Tech Views
Of course, many NDX member firms are AI leaders or beneficiaries, encouraging long-term views on AI that are applicable to QQQ and QQQM.
“The global AI software market had a market size of USD 9.5 billion in 2018 and is forecast to grow to USD 118.6 billion in 2025. The chatbot market is forecast to reach around USD 1.25 billion in 2025, up from USD 190.8 million in 2016, according to Statista,” concluded Hegarty.
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