Last Friday, the Nasdaq-100 Index closed 10.88% below its 52-week high, confirming the widely followed gauge is now in a correction. It might also be an opportunity. NDX’s rally, which has seen the index climb 20% over the past year, has largely been fueled by stocks with AI ties.
That’s been a boon for NDX-tracking ETFs like the Invesco QQQ Trust (QQQ ) and the Invesco NASDAQ 100 ETF (QQQM ). As has been widely reported, those ETFs have benefited from above-average allocations to some of the leading mega-cap AI companies.
However, that status has been a double-edged sword. That’s because more recently, Wall Street has demanded less AI hype and promise and more in the way of tangible, profit-generating results. That more positive scenario could take some time to develop. But patient QQQ/QQQM investors could be rewarded because some experts see a massive wave of AI spending ahead.
AI ‘Arms Race’ Could Lift QQQ
Some asset allocators see a rush to embrace AI percolating. And it’s one that could require sizable expenditures by AI adopters. That could potentially benefit enablers residing in QQQ and QQQM.
“We estimate the major cloud service providers in the US could spend over USD 150 billion combined this year. If we include a couple other mega-cap technology companies that are building out AI infrastructure, that number could eclipse USD 200 billion,” noted Derek Glynn, associate portfolio manager at BNP Paribas. “That’s a big number and would represent more than 50% year-over-year growth.”
AI spending is positive for enablers. But what Wall Street is turning its attention to is whether the expenditures are justifiable for adopters. It’s also wondering and if those firms — many of which reside in QQQ and QQQM — can generate adequate ROI.
Those are plausible considerations and investors should be asking those questions. As it pertains to many of the large- and mega-cap adopters residing in QQQ and QQQM, the good news is they have the balance sheets and business models to “splurge” on AI. Those traits could assuage investors who have been unnerved by recent weakness in AI equities.
“Many of today’s mega-cap tech stocks already have strong core businesses and various means to fund their capital expenditure without necessarily incurring a lot of debt. These core businesses tend to generate high amounts of free cash flow. They’re often supported by numerous competitive advantages like network effects or economies of scale. So, we believe their ability to generate cash is durable,” added Glynn.
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