The technology sector was the biggest winner in the first half of the year. Much of that bullishness was attributable to AI and semiconductor equities. Meanwhile, shares of some well-known software stocks dithered.
Some market observers believe software equities could shake out of their doldrums in the second half of the year. That could highlight opportunities with ETFs like the Invesco QQQ Trust (QQQ ) and the Invesco NASDAQ 100 ETF (QQQM ). Both ETFs have the same lineups, which are famously tech-heavy. That underscores why the funds are higher by nearly 19% year to date.
Obviously, that’s impressive. But it’s even more so when considering QQQ and QQQM are homes to plenty of software stocks. That indicates these ETFs haven’t been hindered by some less-than-stellar showings among software names. But should that scenario reverse, they could find more fuel for their rallies. Plus, the ETFs offer investors the benefit of not having to stock-pick among individual software names.
Some Software Stocks Could Power QQQ, QQQM
Regarding software stocks, including some held by QQQ and QQQM, there’s an overlooked element. And that’s that some of these companies have compelling AI inroads.
“The most important force we see across technology revolves around generative artificial intelligence. Software companies are developing and incorporating next-generation AI capabilities into their solutions. Cloud providers are introducing new services and ramping capacity,” noted Morningstar analyst Dan Romanoff.
One of the software names highlighted by Morningstar is Adobe (ADBE). That company is a member of the QQQ/QQQM portfolio. That stock is off almost 5% on a year-to-date basis. But it’s rallying almost 28% over the past month.
Via its Firefly generative AI models, Adobe has credible AI inroads. Its Photoshop and Illustrator products are relied on heavily by creative professionals. Photoshop and Illustrator are among Adobe’s subscription-based offerings. They are major revenue drivers for the company. Plus, the stock isn’t as pricey on valuation as are some hardware-related AI plays.
“We also see Firefly generative AI models as an important growth driver. Overall, we see plenty of momentum within product innovation, client interest, and revenue creation. And we are encouraged by strong second-quarter results after a slight hiccup on the March earnings call. We continue to see valuation as attractive,” concluded Romanoff.
Plus, seasonality could help QQQ/QQQM software holdings.
“Historical seasonality trends in software in the second quarter and second half of the year are more favorable for positive-estimate-revision trends,” observed Citi analyst Tyler Radke. “We believe this combined with moderating interest rates, stronger IT budgets … and more widespread Generative AI monetization/product releases yield a more attractive setup for software.”
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