Invesco QQQ quarterly outlook report

QQQ Performance

Invesco QQQ ETF (QQQ) returned -4.46% in Q3 (on an NAV basis, 6/30/2022 – 9/30/2022) and outperformed the S&P 500 by 0.42% which returned -4.88%. With investors’ focus firmly on inflation and action from the Federal Open Market Committee (FOMC)— a committee of the Federal Reserve Board that meets regularly to set monetary policy—the market saw a reversal in August away from the short-term rally that had started in June.

QQQ’s overweight exposure to the Consumer Discretionary sector and underweight exposure to the negatively performing Health Care sector were the largest contributors relative performance against the S&P 500 Index. Consumer Discretionary averaged a 16.28% weighting in QQQ (vs. 11.40% in the S&P 500) and rose by 8.31% (vs. 4.36% in the S&P 500) for the quarter. Consumer Discretionary was the only sector in QQQ with positive performance. Health Care averaged a 6.15% weighting in QQQ (vs. 14.44% in the S&P 500) and returned -2.26% (vs. -5.18% in the S&P 500).

Tesla (+18.17%), Amazon.com (+6.39%) and Starbucks (+10.92%) were the largest contributors to QQQ’s performance from the Consumer Discretionary sector. An overweight position to Tesla was the largest contributor to relative performance vs. the S&P 500 in the sector and averaged a weight of 4.56% vs. 2.10% for Q3. The electric automaker announced earnings on July 20^th and reported GAAP earnings-per-share of $0.65 beating analysts’ expectation of $0.51. Revenue was reported at $16.93 billion, a 41.6% year-over-year growth. Price hikes that Tesla implemented managed to offset the rising costs of production the company faced during the quarter.¹ The company saw total deliveries of 255 thousand which equated to 26.5% year-over-year growth. Earnings were also boosted from the sale of 75% of its position in bitcoin. This sale totaled around $936 million and was at a gain of approximately $64 million. The EV maker continued to face challenged due to COVID with the prolonged shutdown of the Shanghai factory.

Regeneron Pharmaceuticals (+16.53%), Biogen (+30.92%) and Dexcom (+8.06%) were the largest contributors to QQQ’s performance from the Health Care sector. Biogen had an average weight of 0.27% in QQQ for the quarter vs. 0.09% in the S&P 500. The strong performance arrived in the month of September and came after data for the phase three trial of its Alzheimer's disease drug, Lecanemab, were published. The results showed improvement in patients in as little as six months with effects increasing over eighteen months. The release occurred after the close on September 27th and the stock traded up 39% the following trading session.

Ultimately, there were few places in the market that provided relief for investors during Q3 with only Consumer Discretionary and Energy being the only sectors that posted positive returns. The -4.46% return of QQQ for Q3 may be deceiving as we saw the drawdown from the August 14^th high through the end of the quarter fall -19.63%. Persistently high inflation, rising interest rates and a strong dollar weighed heavily on all equities as we closed out Q3. 

Single Stock Performance

The best-performing stocks in QQQ for Q3 were Pinduoduo (+54.08%), Seagen Inc. (+22.83%) and Monster Beverage Corp. (+16.02%). The worst performers for the quarter were Netflix Inc (-53.32%), AirBNB Inc. (-48.14%) and Illumina Inc. (-47.24%). 

Market Drivers During Q3

The FOMC had two official meetings during the quarter and also met in August for the annual Jackson Hole Economic Policy Symposium in which the committee took every opportunity to reinforce their dedication to lowering inflation.² The committee raised rates at each of the two meetings that took place during the quarter which caused 2-year Treasury yields to rise above 4% for the first time since 2007. We also saw the dollar strengthen to levels not seen in decades when compared to the British Pound and Euro.

The market continued to rise during July through the middle August. During the time (July 1 – August 15), QQQ rose 18.88% while the S&P 500 rose 13.72%. The FOMC met in July and raised the target rate by 0.75%. This placed the overall rate between 2.25% and 2.50%. While the 0.75% hike did not come as a surprise to the market, comments from Fed Chairman Jerome Powell in the press conference following the meeting provided the needed backdrop for the market to make a strong move upwards. Powell commented that he believed that the target rate is now neutral, meaning that the rate is neither accommodative nor restrictive. Prior to this meeting, it was believed that the neutral rate was higher. This caused some investors to believe that there may not be as many rate hikes in the future and the size of the rate hikes may not be as large as initially anticipated. Many investors also believed that this may lead to future rate cuts to come as soon as 2023, as indicated by the Fed Funds futures.³

However, this was short-lived as we saw the reversal come on August 16^th caused by comments from Powell during the Jackson Hole Economic Policy Symposium. Powell delivered a short 8-minute speech in Jackson Hole although it did have a large impact on equity markets. Lower and stable inflation appeared to be the primary focus for the Fed going forward. The Chairman did not provide insight into how large the rate hike at the September FOMC meeting will be but did state the size will be contingent on the “totality” of the data. It was also stated that taming inflation will require restrictive policy, or higher interest rates, for some time. Powell commented, “While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses.” From August 16^th through the end of the quarter (9/30), we saw QQQ decline 19.63% while the S&P 500 fell 16.36%.

The FOMC met for their scheduled meeting in September and made the decision to raise the target rate range to 3.00% - 3.25%. This is the highest the target rate has been since December 2007. While the 0.75% rate hike didn’t come as a surprise to investors, the new dot plot, which shows FOMC members’ future expectations for where the target rate will be, revealed some insight as where it may be going in the near future. The dot plot showed that the average consensus for end of year target rate came in at 4.50%. Analysts believed that this would imply another 0.75% hike at the November meeting and a 0.50% rate hike at the December meeting. Powell doubled down on his hawkish statements that he gave in Jackson Hole during his post-meeting press conference. He reiterated his concern from the Symposium of current inflation becoming entrenched and that a further slowdown in the economy will be needed to appropriately combat inflation.

The market also saw a large selloff in bonds as we saw the yield curve invert further through the month.⁴ The 2-year Treasury yield closed the month at 4.28%, the highest it has been since July 2007. The 10-year Treasury yield rose to 3.83%, the highest it has been since March 2010, while the 30-year yield rose to 3.78%. These higher interest rates added pressure to the selloff seen in equities, particularly growth companies. Higher interest rates may raise concerns around shrinking profit margins for companies who rely more heavily on debt as it costs rise relate to the servicing of that debt. 

The US Dollar continued to gain strength as US interest rates rose. The Dollar Spot Price Index has risen over 17% year to date and is at the highest level this index has been since May 2002.⁵ As a result, the British pound to US dollar traded to $1.12, the lowest it has been since 1985. The Euro also lost value vs. the US dollar and traded to $0.98, lowest it has been, and the first time it has traded under $1, since 2002. The volatility caused several countries including Japan, China and the UK to intervene in an attempt to slow the depreciation seen against the dollar. Over 40% of the Nasdaq 100 Index sales are derived from overseas. A strong US dollar may pressure international customers as local currencies devalue and affect purchasing power of US goods.

Outlook

QQQ investors will be watching earnings announcements from heavyweight companies Apple, Microsoft, Amazon, Alphabet, Tesla and Meta Platforms. Tesla will be the first to announce during the third week of October while Alphabet, Microsoft, Meta Platforms, Amazon and Apple will announce the last week of October. We have seen expectations come down in forward 12-month earnings estimates for most equities during the previous quarter. The extent of any slowdown will be gauged through the growth of previous quarter’s earnings and forward guidance that companies provide this earnings season.

The market will more than likely remain dependent on action from the FOMC. The committee will meet in both November and December with the potential for rate hikes coming out of both meetings. As they have communicated throughout the year, they will remain data dependent for the decisions that they make. Elevated inflation and continued strength in the labor market may indicate further rate hikes.

Uncertainty remains in the market as we move into the last quarter of 2022. High inflation, rising interest rates, slowing growth and a strong dollar will likely continue to be headwinds. Investors should continue to use their own risk tolerance and time horizon to determine their asset allocation.