Q’s Have Quality and That’s Critical

Plenty of the related stocks reside in exchange traded funds, including the Invesco QQQ Trust (QQQ B+) and the Invesco NASDAQ 100 ETF (QQQM B), and plenty of the components in QQQ and QQQM fit the bill as quality names.

Due to the declines endured by large- and mega-cap growth stocks this year, some investors may be thinking assets such as QQQ and QQQM lack quality traits or that quality investing is out of style. Deeper examinations reveal a different point of view.

“Stocks have historically performed well versus bonds during Fed rate-hiking episodes. In the case of bonds, the inverse relationship between price and yield means their prices fall as rates rise. For stocks, the positive impact of earnings has historically outweighed the drag that higher rates apply to valuations,” noted BlackRock.

While there’s often debate when it comes to quantifying and defining the quality factor, it has some clear hallmarks, including sturdy balance sheets and sound management teams. Those are boxes checked by a variety of marquee components in QQQ and QQQM, including Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT), and Google parent Alphabet (NASDAQ: GOOG). That trio combines for about 30% of the weights of QQQ and QQQM.

Regarding Alphabet, some analysts see an opportunity in the internet search giant following a recent share split, which could lure retail investors to the stock.

“We expect continuing growth in the company’s cash flow, as we remain confident that Google will maintain its leadership in search. We foresee YouTube contributing more to the company’s top and bottom lines, and we view investments of some of that cash in moonshots as attractive. Whether they will generate positive returns remains to be seen, but they do present significant upside,” wrote Morningstar analyst Ali Mogharabi.

Additionally, companies with clear quality characteristics may also offer better earnings growth and favorable volatility traits and that’s something to consider in the market climate.

“That said, we do expect further equity market volatility as investors adjust to the new regime, and companies will weather the storm with varying degrees of agility and success. We believe the key to navigating this environment is to focus on companies with quality characteristics ― particularly strong balance sheets and healthy free cash flow,” concluded BlackRock.

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