The Nasdaq-100 Index (NDX) is higher by 6.7% year to date. That confirms tech stocks remain in strong form. Still, some market observers are concerned valuations in tech and other high-growth sectors are becoming somewhat frothy.
Market participants considering ETFs such as the Invesco QQQ Trust (QQQ) and the Invesco NASDAQ 100 ETF (QQQM), both of which follow NDX, might not need to fret about valuations. That’s because the techn sector has some positive attributes on its side that can render elevated valuations moot points.
For example, the high-growth prospects offered by many QQQ and QQQM member firms are attractive in any environment. But they are even more so when economic growth is sluggish. The U.S. economy is expected to post higher rates of growth this year than other large developed economies. But GDP growth here probably won’t set the world ablaze. That indicates many investors will be willing to embrace the tech sector regardless of valuation.
QQQ, QQQM Have Other Tailwinds
As noted by Charles Schwab in the firm’s recent sector outlook, tech scores will not only perform in terms of growth prospects, but also when it comes to quality metrics. Those can include free cash flow, balance sheet strength, and ability to grow shareholder rewards. These are all factors that many QQQ and QQQM holdings are already excelling at.
“Information Technology tends to do well when strong economic growth encourages companies to invest in technology upgrades and consumers to buy new devices,” according to Schwab. “Some of the larger members are not in the ‘long-duration’ camp—companies expected to produce their highest cash flows in the future—given they have current earnings growth and strong cash positions.”
The outlook is similarly compelling for communication services stocks. That’s the sector that Alphabet (NASDAQ: GOOG) and Meta Platforms (NASDAQ: META) call home. That group represents almost 16% of the QQQ/QQQM rosters. Schwab noted that companies in this sector should benefit from rising internet advertising and subscription revenue, assuming the economy remains strong. Those catalysts could be enhanced because 2024 is a presidential election year.
Schwab is somewhat constructive on the healthcare sector. That undervalued group accounts for 6.43% of the Invesco ETFs. That could provide a small buffer if economic growth slows.
“Information Technology tends to do well when strong economic growth encourages companies to invest in technology upgrades and consumers to buy new devices. Some of the larger members are not in the “long-duration” camp—companies expected to produce their highest cash flows in the future—given they have current earnings growth and strong cash positions,” concluded the research firm.
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