The Nasdaq-100 Index (NDX) is lower by 8.28% year-to-date as growth stocks languish, but there are some reasons for optimism.
Should that optimism turn into material, actionable results, exchange traded funds such as the Invesco QQQ Trust (QQQ ) and the *Invesco NASDAQ 100 ETF (QQQM ), both of which track the Nasdaq-100 Index (NDX), could benefit. Predictions for significant S&P 500 growth over the next year, if accurate, will obviously benefit the broader market and QQQ and QQQM.
“Industry analysts in aggregate predict the S&P 500 will see a price increase of 16.8% over the next 12 months,” notes John Butters of FactSet. “This percentage is based on the difference between the bottom-up target price and the closing price for the index as of March 24. The bottom-up target price is calculated by aggregating the median target price estimates (based on company-level estimates submitted by industry analysts) for all companies in the index.”
The validity of using either QQQ or QQQM as a play on that sentiment is best expressed at the sector level. Again, it’s a matter of current forecasts proving reasonably accurate, and if that happens, the Invesco ETFs could be in for some notable price appreciation.
“At the sector level, the Communication Services (27.9%), Consumer Discretionary (21.1%), and Information Technology (+19.9%) sectors are expected to see the largest price increases, as these three sectors had the largest upside differences between the bottom-up target price and the closing price on March 24,” adds Butters.
The reasoning for QQQ or QQQM as plays on the above is simple: The Nasdaq 100 Index allocates over 84% of its weight to tech, communication services, and consumer discretionary stocks. Conversely, NDX has no energy exposure and devotes just 1.09% of its weight to utilities stocks. Those are the sectors expected to see the smallest price appreciation over the coming 12 months.
Another factor to consider is analysts’ recent penchant for underestimating S&P 500 performance, which indicates that there could be upside surprises regarding the aforementioned forecasts.
“In recent periods, industry analysts have underestimated the closing price of the index 12 months later. Over the past five years, Industry analysts have underestimated the price of the index by 2.8% on average (using month-end values). Over the past 10 years, industry analysts have underestimated the price of the index by 0.1% on average (using month-end values),” concludes FactSet’s Butters.
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