Mega-cap growth stocks are supporting equity market upside in 2023, confirming rebounds from dismal 2022 performances. With the Federal Reserve signaling that it could hold off on further interest rate increases for the remainder of this year, the environment may be growing more constructive for growth stocks, such as internet stocks.
That could mark good news for exchange traded funds, including the Invesco QQQ Trust (QQQ ) and the Invesco NASDAQ 100 ETF (QQQM ). Those ETFs, which have identical lineups, are higher by 21.56% year-to-date as of May 8, indicating the benefits of being growth-heavy when that investing style is back in favor.
Investors should pay attention to what’s driving QQQ and QQQM this year, and it’s not just tech stocks. While these ETFs are often associated with tech, some sector classification study is warranted because some stocks that were once tech names but no long reside in that sector are contributing to 2023 upside for QQQ and QQQM. Those names include internet stocks like Google parent Alphabet (GOOGL) and Facebook parent Meta Platforms (META).
With Internet Stocks, Lean in on Communication Services
Alphabet and Meta are members of the communication services sector — the second-largest sector exposure in QQQ and QQQM. The two stocks combine for 11.39% of the QQQ and QQQM rosters and are the ETFs’ two largest components from the communication services arena.
Both companies are prioritizing streamlining operations this year, and while that can be painful on some fronts, it’s clear that markets like the plans.
“Now, this year, the market is taking into account that the company is focusing more on cost efficiency, slowing down growth in headcount, reducing its real estate footprint, and just operating much more efficiently,” said Morningstar analyst Ali Mogharabi of Alphabet. “All of that, of course, helps the bottom line. And then, on the top line, cloud continues to perform well, which, by the way, was also profitable for the first time.”
Looking at the factors supporting Meta’s 2023 rebound, those include the potential that U.S. policymakers will finally take action to ban rival TikTok, as some states have done on employee devices, and resilience in internet advertising spending.
It remains to be seen, but with a presidential election year looming, momentum for a TikTok ban could build, potentially benefiting Meta shares along the way. As for ad spending, Meta could remain dominant on that front.
“With user growth plus engagement levels remaining high, Meta’s platforms are likely to keep attracting ad dollars. Even with the emergence of new competition, we haven’t seen significant or consistent decline in its daily or monthly user count, and engagement has remained pretty stable,” concluded Mogharabi.
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