Following an impressive, artificial intelligence (AI)-charged rally in the first half of 2024, the Nasdaq-100 Index (NDX) succumbed to significant selling pressure in July. Investors fretted about AI-related tech spending and lofty valuations.
While some of those losses have been clawed back, the Invesco QQQ Trust (QQQ ) and the Invesco NASDAQ 100 ETF (QQQM ) – both of which track NDX – remain about 6% below their prior highs. That’s not an indictment of the exchange traded funds. To be fair, QQQ and QQQM have reclaimed some of the momentum lost in July. That could be a sign of better things to come in the waning months of 2024.
Additionally, there are positive fundamental catalysts afoot for many QQQ/QQQM holdings. Those include the point that NDX isn’t as richly valued as some market participants perceive it to be. Additionally, by some estimates cloud computing spending could reach $200 billion this year, representing a significant year-over-year increase.
QQQ/QQQM Fundamentals Solid
Hype surrounding the AI investment theme sparked concerns . Some worry that the Nasdaq 100 could be nearing an ominous sequel to the technology bubble bursting in 2000. However, there’s a big difference between NDX today and the index of more than two decades ago.
“The current forward price-earnings ratio of around 26x is near the high end of where valuations have been over the last 20 years, though they are lower when the extreme levels of the late 1990s tech bubble are included. Valuations were as high as 48x in 2000, with outliers at more than double that level,” noted Daniel Morris of BNP Paribas.
NDX isn’t as richly valued today as it was in 2000. Additionally, there’s another fundamental factor in favor of QQQ and QQQM. As Morris pointed out, return on equity on NDX components was 16% in 2000, but it’s 26% today. That’s a sign some QQQ and QQQM holdings warrant higher valuations.
Morris acknowledges that there have been times in recent years when NDX sported more attractive valuations, but there are occasions when investors have to pay up for long-term growth or risk missing out on the growth. That may be the scenario facing market participants today.
“Admittedly, overall valuations may now look less compelling than they did over the past couple of years. However, we believe the tech sector deserves a premium valuation given that revenue growth is faster and cashflow generation stronger than for many companies in the broader market,” concluded Morris.
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