As measured by the various S&P sector indexes, tech and communication services equities were the best performers in 2023. And the competition wasn’t all that close.
That had material benefit for investors holding the Invesco QQQ Trust (QQQ) and the Invesco NASDAQ 100 ETF (QQQM). Those funds, which have the same lineups, allocate nearly 65% of their rosters to tech and communication services stocks. In large part, that explains why QQQ and QQQM jumped nearly 54% last year.
Obviously, that’s an impressive annual showing that’s hard to repeat. So are the 2023 gains posted by S&P technology and communication services benchmarks, both of which exceeded 50%. As such, investors are right to ponder the fate of those marquee sectors in 2024. But the good news is plenty of market observers believe the long-term outlook for tech and tech-adjacent communication services names remains bright.
2024 Could Bring Tests, Opportunity for Tech
One of the biggest concerns investors have about tech stocks entering 2024, particularly the magnificent seven that loom so large in QQQ and QQQM, is that valuations appear stretched. That puts some burden on those companies and others found in those ETFs to deliver the goods regarding earnings growth. It’s possible that’s exactly what will happen.
“At this point, the situation doesn’t look like a repeat of the ‘dot-com’ bubble of 1999-2000,” said Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “During that time, stock prices soared for many young companies with interesting prospects, but no real earnings. Tech companies are generating earnings. But valuations of many tech stocks have been driven higher. So the question in 2024 is whether they can maintain earnings growth that lives up to current stock price.”
Further adding to the allure of QQQ and QQQM is that the ETFs were able to endure elevated interest rates in 2023. That indicates the funds could be poised to still generate upside, or at the very least, prove somewhat resilient if the Federal Reserve disappoints markets by not lowering interest rates.
“Because of their healthy balance sheets, a number of these firms can self-fund growth and don’t need to issue bonds and deal with higher borrowing costs,” added Haworth.
It’s worth noting that several of the most prominent holdings in QQQ and QQQM are among the most cash-rich companies in the U.S. and are also among those with the highest corporate credit ratings.
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