QQQ quarterly outlook report

QQQ Q3 Performance

Invesco QQQ ETF (QQQ) extended its streak of positive quarterly total return performance to four consecutive quarters. The fund advanced by 2.07% for the quarter (on an NAV basis, 06/30/2024 – 09/30/2024) but underperformed the S&P 500’s total return of 5.89% by 3.82%. All but two sectors, per Industry Classification Benchmark (ICB), out of the 10 that QQQ has exposure to, finished in positive territory for the quarter. In comparison, the energy sector (-2.01%) was the only ICB sector out of eleven in the S&P 500 that ended in negative territory for Q3. Within QQQ, the energy sector declined by 4.78% for Q3, while the Technology sector fell by 1.00%. The biggest headline for Q3 came at the Federal Reserve’s (Fed) second meeting of the quarter (September) where the Federal Open Market Committee (FOMC) cut its target rate by 50 basis points, ending the speculation of when the first rate cut will happen.¹ The target rate had been 5.25% - 5.50% for over 14 months.²

QQQ’s overweight exposure and underperformance to the Technology sector and underweight exposure and underperformance within the Industrials sector (per ICB) were the largest detractors to relative performance against the S&P 500 Index. Technology averaged a 60.15% weighting in QQQ (vs. 36.29% in the S&P 500) and declined by 1.00% (vs. +0.70% in the S&P 500) in the third quarter. The Industrials sector averaged an 4.29% weighting in QQQ (vs. a 11.53% weighting in the S&P 500 Index) and advanced by 9.39% (vs. +12.66% in the S&P 500) for the quarter. The lack of exposure to the Financials sector also hurt relative performance, as the sector averaged a 10.2% weighting in the S&P 500 Index and advanced by 10.40% in Q3.

The three largest individual detractors to QQQ’s relative performance against the S&P 500 Index for Q3 were Qualcomm, Lam Research Corp and Intel. All three companies reside in the technology sector and all reported earnings within two days of each other. In each instance, shares came under considerable pressure following their respective earnings releases. On July 31, Qualcomm reported quarterly earnings per share and revenue that exceeded analysts’ expectations and despite an initial rally after the news, shares were lower by 9.37% in the trading session following the announcement. Investors were disappointed by comments suggesting that the smartphone market is recovering only gradually from a lengthy slowdown. Qualcomm provided revenue and earnings guidance for the current quarter that exceeded estimates but saw the global smartphone market shipments to be “flattish” or up by a single digit percentage for the year. Shares of Qualcomm were lower by 14.18% for the quarter and the company averaged a 1.34% weight in QQQ vs. a 0.43% weight in the S&P 500 Index. Lam Research also reported earnings on July 31^st and announced earnings per share and revenue that beat analysts’ forecasts.³ Although forecasts for current quarter adjusted earnings per share along with margins missed estimates and shares traded lower by 9.87% in the trading session immediately following the release. Lam Research traded lower by 23.13% for the quarter and averaged a 0.77% weight in QQQ vs. 0.24% in the S&P 500 Index. On August 1, Intel reported quarterly revenue that missed estimates and earnings per share that was ~80% lower than analysts’ forecasts ($0.02 vs. $0.102). The chipmaker provided revenue guidance of $12.5 billion to $13.5 billion for the current quarter, badly missing analysts’ expectations of $14.38 billion. The company announced that it will suspend quarterly dividend payments until it sees an improvement in cash flows; Intel had paid a dividend since 1992. Intel also outlined that it plans to cut over 15% of its workforce as it grapples with rising costs. Shares were lower by 26.06% in the trading session immediately following the earnings release. Towards the end of the quarter, shares saw some positive momentum after the company announced its plan to turn its foundry business into a subsidiary with its own board and potential to raise outside capital. In late September, news broke that Qualcomm had approached Intel about a potential purchase and helped shares end the quarter on a mostly positive note. From September 10 through the end of the quarter, Intel shares rose by 23.60%. Over the course of the entire third quarter, Intel shares averaged a 0.72% weight in QQQ vs. a 0.23% weight in the S&P 500 Index and traded lower by 23.75%.

A bright spot for the Technology sector and the largest contributor to QQQ relative performance vs. the S&P 500 Index was Tesla. Shares traded higher by 32.22% in Q3, and the company was the second-best performing stock in QQQ. Tesla shares shook off a disappointing earnings release in late July, where it reported revenue that exceeded analysts’’ estimates, but missed the adjusted earnings estimate by nearly 14%. CEO Elon Musk announced that the event detailing the highly anticipated “robotaxi” was delayed until October. Shares traded lower by over 12% in the session immediately following the report. Although Tesla ended the quarter with optimism around Q3 vehicle deliveries after an analyst report forecasted that deliveries will beat consensus estimates with ~8% growth. There is also much attention focused on the company’s delayed October 10^th robotaxi event where it plans to share details about its autonomous driving capabilities.

Near the end of Q3, an interesting development from the world of AI came from an industry not immediately associated with the technological advancement. It was announced that Constellation Energy and Microsoft entered into a 20-year power purchase agreement where Constellation will provide carbon-free energy for Microsoft’s data centers. Constellation plans to restart its nuclear reactor at Three Mile Island in Pennsylvania which is expected to be operational in 2028. The headline made waves as the power demanded to run AI functions continues to grow and interest in carbon-free nuclear power has been viewed as one potential solution to address the increasing demand. Shares of Constellation Energy advanced by over 22% on September 20, the day of the announcement. From September 19 through September 30, shares advanced by 24.71%, representing a sizable portion of the 30.08% Q3 performance.

New Addition

Over the course of the quarter, two companies were deleted from the Nasdaq 100® Index (and QQQ) and one company was added to the index (and QQQ). Walgreens Boots Alliance Inc. was deleted from the Index after the company’s market cap had fallen to less than 0.1% of the index’s total market cap for two consecutive month ends. Effective July 22^nd, Walgreen’s Boots Alliance was replaced in the Nasdaq 100 Index (and QQQ) by Super Micro Computer, Inc, the San Jose based computing company. On July 8^th, GRAIL, Inc. was deleted from the index (and QQQ) after it was unable to establish a 0.10% weight within two days of trading in the index. GRAIL was added to the Nasdaq 100 index (and QQQ) on June 25^th after it was spun off from biotech company Illumina, also an index (and QQQ) member.

Single stock performance

The best-performing stocks in QQQ for Q3 were PayPal Holdings (+34.46%), Tesla Inc. (+32.22%) and Doordash Inc. (+31.21%). The worst performers for the quarter were Super Micro Computer (-47.04%), Moderna Inc. (-43.72%) and Dexcom Inc. (-40.87%).

Market drivers during Q3

The third quarter had a challenging start for QQQ as July’s performance was categorized by an equity rotation away from large cap growth.

Value stocks outperformed growth stocks while Small Cap stocks were among the best performers (The S&P 500 Value, S&P 500 Growth and S&P Small Cap 600 returned 9.27%, 3.72% and 10.13%, respectively). Moving down market capitalization worked well in July as small cap equity markets outperformed mid cap equity markets which outperformed large cap equity markets (comparing the S&P 600 Index vs. S&P 400 Index vs. S&P 500 Index). As the quarter progressed, the trend reverted back to large caps outperforming mid-caps, and mid-caps outperforming small caps.

Inflation readings continued to moderate throughout the quarter. The Consumer Price Index (CPI) reports for June, July and August were released and showed year-over year growth of 3.0%, 2.9% and 2.5%, respectively.⁴ July’s 2.9% reading was the first time the year-over-year gauge was under 3.0%. After an acceleration in monthly readings over the first half of the year (from January to June), Producer Prices showed a downward trajectory in Q3 with the Producer Price Index (PPI) readings for June, July and August coming in at 2.6%, 2.2% and 1.7%. Investors have kept a keen eye on these measures as indicators of when the Federal Reserve would potentially change its monetary policy stance.⁵

Over the course of the third quarter, the Federal Open Market Committee (FOMC) met twice, in July and September, although with considerably more fanfare in September. In the July meeting the FOMC kept its rate target steady for the eighth consecutive meeting at 5.25% - 5.50%, where it has remained since July 2023. The Minutes of the meeting, released three weeks after on August 21, showed that most of the participants supported policy easing in September if the economic data was in line with expectations. According to Fed Funds Futures, the day before the September meeting announcement, market participants had fully priced in one 25 basis point cut, with many anticipating a 50 basis point reduction.⁶ Then, September 18 marked the long-awaited start of the Fed’s rate cutting cycle as the FOMC cut its target rate by 50 basis points to 4.75% - 5.50%. The rate cut marked the first change in the Federal Reserve’s target rate since July 2023, and the first rate cut since emergency measures in the early stages of the COVID pandemic. Chairman Powell noted that the outsized cut represents a “recalibration of our policy stance” as the central bank strives to maintain price stability and a strong labor market. The September reading also brought the latest round of the Federal Reserve’s Summary of Economic Projections and updates to a few key figures.⁷ According to the dot plot, the median FOMC member anticipates 50 basis points of additional interest rate cuts for the remainder of 2024.⁸ For 2025, the median member forecasts 100 basis points of target rate cuts and 50 basis points of rate cuts in 2026. Inflation expectations were also revised down, with the Personal Consumption Expenditure (PCE) forecast for 2024 lowered to 2.6% (down from the 2.8% in June), 2025 lowered to 2.2% (down from 2.3% in the June projection) and keeping the 2.0% forecast steady for 2026.⁹ Additionally, participants increased estimates for the unemployment rate, with a forecast of 4.4% for 2024 (up from the 4.0% projection in June), 4.4% in 2025 (up from the 4.2% projection in June) and 4.3% for 2026 (up from the 4.1% projection in June).

Outlook

Focus remains on the Fed’s policy and how the trajectory of rate cuts will shape out. The FOMC is scheduled to meet twice during the quarter, first on November 6-7 and again from December 17-18 where there will be an updated Summary of Economic Projections. At the time of writing (October 1), market participants, through Federal Funds futures, are projecting just under three 25 basis point rate cuts between the two meetings. These percentages are market driven and can (and usually will) change on a daily basis. Expect larger moves in the futures market around major economic releases of price gauges (CPI, Personal Consumption Expenditure, Producer Price Index), employment readings (initial jobless claims, ADP employment reports and nonfarm payrolls) and GDP reports.¹⁰ As always, any commentary from Fed officials, whether at scheduled meetings or events, interviews, etc. will be scrutinized for clues about monetary policy changes and/or timing.

Q4 will bring the 2024 Presidential election and all the headlines and noise that comes with it.  As in previous election years, we expect volatility to increase as investors monitor preliminary voting projections in key swing states and digest various policy stances from each candidate. There are also a number of key races in the House and the Senate that bear watching to determine whether 2025 will be a year with a unified or dividend government. From an investing perspective we ultimately believe that investment performance is driven by the health of the underlying economy along with the fundamental strength of companies, not necessarily which party is in office.

Focus will continue around the Magnificent Seven companies particularly during earnings season.¹¹ We covered Tesla’s disappointing Q2 results above and some of the optimism that surrounds the company’s next earnings release, scheduled for October 23. Of the remaining six Magnificent Seven companies, all six reported earnings per share that exceeded analysts’ forecasts and all but Amazon beat revenue estimates. Despite the overwhelmingly positive results, share performance in the subsequent trading day were mixed. Investors appear to be focusing on more than just previous quarter results: future guidance as well as results and forecasts for certain business segments can have a material impact on share performance. These six other companies will report earnings beginning October 24. In total over calendar Q3, the Nasdaq 100 Index delivered solid fundamental growth with a 17.70% year-over-year revenue growth rate and 11.38% earnings growth. For this coming quarter expectations for Nasdaq 100 index revenue growth stands at 17.70% and earnings are forecast to grow at an 18.67% rate.