The next few weeks will bring a slew of second-quarter earnings reports from large-cap communication services and technology companies. That means investors could glean more insight regarding the vibrancy around the AI investment thesis.
That also means potential tests await ETFs like as the Invesco QQQ Trust (QQQ ) and the Invesco NASDAQ 100 ETF (QQQM ). Both funds follow the AI-heavy Nasdaq-100 Index (NDX). The two ETFs sported year-to-date gains of 16% as of July 19. But the start of the third quarter has brought headwinds in the form of asset allocators moving into value and small-cap stocks.
Some experts don’t view that rotation as sustainable over the long haul. But investors’ renewed affinity for value and small-cap fare could put some burden on QQQ/QQQM AI holdings to meet and exceed expectations when it comes to second-half AI outlooks.
For QQQ Holdings, Costs Will Be in Focus
One of the primary fundamental benefits associated with QQQ and QQQM is that the ETFs are homes to some of the most cash-rich companies in the U.S. Strong balance sheets and free-cash-flow-generating capabilities are all-weather traits. But they’re relevant in the AI conversation because products sold by AI enablers such as Nvidia (NVDA) aren’t cheap.
“About 40% of Nvidia’s revenues represent expenses for its largest customers. Though companies like Microsoft and Amazon have embraced Nvidia’s AI-powered chips in part due to growing demand from their own customers, and there are signs that AI is helping profit growth at tech mega caps, it’s worth keeping an eye on their expenses,” according to Charles Schwab research.
Tech is a margin-sensitive sector. Related commentary on upcoming earnings calls could go a long way toward determining the near-term fortunes of a variety of QQQ and QQQM member firms.
It’s possible that following a significant round of layoffs in the tech sector dating back to last year, that theme will continue as companies look to trim some fat and keep margins elevated. Another theme to watch for as QQQ/QQQM earnings reports roll in is how AI adopters are deploying the technology in areas such as cloud computing and internet advertising.
“AI can improve the function of computers so they can reason and learn more like humans and process vast amounts of data more quickly, among other uses,” added Schwab. “Advancements in semiconductor chips built by companies like Nvidia and AMD are being incorporated across multiple industries to help improve everything from online advertising to warehousing efficiency to phone performance. AI chips also play a vital role in the cloud, allowing data centers to harvest insights about sales trends and customers more quickly.”
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