Experienced investors know that growth stocks can be sector agnostic. However, they often hail from two sectors: communication services and technology.
The expansive landscape of large-cap growth index funds and exchange traded funds reflects as much. For example, the Invesco QQQ Trust (QQQ ) and the Invesco NASDAQ 100 ETF (QQQM ), both of which track the Nasdaq-100 Index (NDX), are heavy on stocks from those two sectors. Technology and communication service names account for 49.61% and 16.28%, respectively, of those ETFs’ rosters.
Only one other sector, consumer discretionary, commands a double-digit allocation in QQQ and QQQM. This confirms that tech and communication services stocks chart the course for these ETFs’ performance. Fortunately, the 2025 outlook for those groups is broadly constructive.
Why QQQ Can Extend Gains in 2025
With just a few weeks left in 2024, it’s impossible to quibble with the performance offered by QQQ and QQQM. The ETFs are up 28.56% year-to-date. On the surface, that might imply a 2025 sequel could be hard to deliver, but it’s not impossible.
When it comes to communication services, which Charles Schwab rated “outperform,” the wide moats of Meta Platforms (META) and Alphabet (GOOG) could again benefit QQQ/QQQM in 2025, but there’s potential for some regulatory risk.
“The sector may underperform if economic growth slows. A persistent risk is the dominance of bigger members, which command a large share of the sector’s market cap and thus determine much of its performance,” noted Schwab.
On the bright side, analysts expect the incoming Trump Administration is likely to focus more on big tech’s alleged interference with free speech. It may pay less attention to the size and dominant market positioning of companies like Alphabet and Meta.
Schwab rated the broader tech sector “marketperform,” noting that the group holds some richly valued companies. However, that’s been the case for some well-known QQQ/QQQM holdings this year and it hasn’t weighed on performance.
“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,” added Schwab.
The brokerage is reserved in its assessment of consumer discretionary, in part citing concentration risk in the sector. However, if Amazon (AMZN) and Tesla (TSLA) shine in 2025, that could benefit QQQ and QQQM as those stocks combine for about 10% of the ETFs’ weights.
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