Betting against growth and tech equities was a winning idea for a time earlier this year. But that span was fleeting. It was quashed by the resurgence of the Magnificent Seven, among other large-cap growth names.
Confirmation of the resurgent growth/tech trade arrived last Friday when the Nasdaq Composite ascended to an all-time high. That’s good news for the Invesco QQQ Trust (QQQ ) and the Invesco NASDAQ 100 ETF (QQQM ), which track the Nasdaq-100 Index (NDX).
The two Invesco ETFs closed last week at 52-week highs, extending their 90-day gains to nearly 18%. That’s certainly good work in short order. And rallies may imply upside from here is limited. But some market observers don’t see things that way. Rather, they argue that growth and tech are the places to be over the near term. That indicates QQQ and QQQM could generate more upside in the months ahead.
Solid Case for QQQ
Valuations on technology stocks aren’t as stretched as some investors assume. The sector isn’t a value destination in the strictest sense of that term. But it’s not as pricey as some think.
“From a valuation standpoint, while tech is not cheap, valuations are within range,” noted BlackRock. “According to data from Bloomberg, the tech heavy Nasdaq 100 is trading at 25x FY1 estimates and 22x FY2. Based on price-to-earnings ratios, the Russell 1000 growth index trades for approximately 1.8x the value index. Relative valuations are right around the five-year average and down from the post-pandemic peak of 2×.”
The “overstretch valuation” argument is often the most cited in the case against tech stocks and ETFs like QQQ and QQQM. So if it’s diminished or off the table altogether, it’s not a stretch to see a path higher for these ETFs.
Another point in the valuation debate QQQ/QQQM investors should consider is that many of the ETFs’ holdings some market participants view as extended on valuation are delivering growth rates warranting elevated multiples. In other words, investors are getting something for the perceived high cost of admission.
“Elevated growth valuations are arguably justified based on profitability, margins and still stellar earning growth,” concluded BlackRock. “We continue to live in a world in which mega-cap tech companies remain remarkably profitable, and despite large capital-spending plans, capable of driving strong earnings growth. On a global basis, the MSCI World tech sector is expected to lead the rest of the market in both earnings and sales growth.”
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