Signs of Life Found In Important QQQ Sectors

As a result, a slew of growth-heavy exchange traded funds with large weights to those sectors, including the Invesco QQQ Trust (QQQ B+) and the Invesco NASDAQ 100 ETF (QQQM B), languished through the first six months of 2022.

High inflation and rising interest rates, the latter of which makes growth companies’ future cash flows less attractive, are among the culprits pressuring ETFs such as QQQ and QQQM this year. However, things appear to be turning for the better.

“For most of the first half of 2022, the only sector posting gains was energy, with utilities living up to their defensive reputation and posting the smallest losses among the 10 remaining sectors,” noted Morningstar analyst Lauren Solberg. “But since June 16, technology and consumer cyclical stocks are the leading sectors after being hit harder than the rest of the market in the first half of the year. Stocks leading the bounce include Amazon (AMZN), Tesla (TSLA), Home Depot (HD), and McDonald’s (MCD).”

Home Depot and McDonald’s aren’t members of the QQQ and QQQM portfolios, but Amazon and Tesla combine for the two largest consumer cyclical holdings in both Invesco ETFs and combine for about 11% of the funds’ weights. Overall, the consumer discretionary is the third-largest sector allocation in the ETFs, combining for about 16% of the rosters. Some easing of inflation expectations is helping the sector.

“The TIPS market provides a window into where people think inflation is headed through the breakeven rate, which compares yields on TIPS to their non-inflation-adjusted counterparts. The breakeven rate is essentially the expected rate of inflation for the time period covered by the bonds,” added Solberg. “The 5-year breakeven inflation rate dropped to 2.67% on July 20, down from a high of 3.60% in late March. Its current levels are much closer to the Fed’s long-term policy target of 2% inflation.”

In order for QQQ and QQQM to build on recent bullishness, contributions from the technology sector are required because that group accounts for more than half the ETFs’ rosters. Fortunately, there are some signs of that happening, and those contributions are coming from several of the ETFs’ marquee holdings.

“Consumer electronics stocks, companies that manufacture and sell audio visual equipment, rose 18.5%, led by Apple (AAPL). The software infrastructure industry, which includes companies that develop and provide products for various business applications, gained 8.3%, as Microsoft (MSFT) gained 7.1%. The semiconductor industry was up 11.0% led by Nvidia (NVDA),” concluded Solberg.

All three of those stocks reside in QQQ and QQQM.

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