Market outlook

QQQ quarterly outlook report

Senior Factor & Core Equity Strategist Ryan McCormack shares quarterly highlights and the outlook for Invesco QQQ ETF
Performance takeaways
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Invesco QQQ advanced by 14.52% in Q4 on an NAV total return basis and outperformed the S&P 500 Index as QQQ capped off the best calendar year performance in its nearly 25-year history.

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QQQ’s overweight allocations and outperformance within the Technology sector along with its underweight exposure and outperformance within the Energy sector were the biggest drivers of relative outperformance versus the S&P 500 Index in Q4.

QQQ performance

Invesco QQQ ETF (QQQ) advanced by 14.52% for Q4 (on an NAV basis, 09/30/2023 – 12/31/2023) and outperformed the S&P 500’s total return of 11.68%. The quarter started where Q3 left off, as a challenging October raised questions about the Federal Reserve’s (Fed) ability to engineer an economic soft landing and QQQ declined by 2.05% in the opening month of Q4. Investors continued to grapple with whether or not the Federal Open Market Committee (FOMC) would continue its rate hiking cycle after a “pause” at the September meeting.1 Ultimately, the Fed held their target rate steady across its two fourth quarter meetings as November and December QQQ performance saw a considerable turnaround, with 10.79% total return in November and 5.53% total return in December.  

QQQ’s overweight exposure and outperformance within the Technology sector and underweight exposure and outperformance within the Energy sector (per Industry Classification Benchmark- ICB) were the largest contributors to relative performance against the S&P 500 Index. Technology averaged an 58.37% weighting in QQQ (vs. a 32.80% weighting in the S&P 500 Index) and advanced by 18.32% (vs. +16.31% in the S&P 500). Energy averaged a 0.62% weighting in QQQ (vs. 4.36% in the S&P 500) and gained 0.33% (vs. -6.72% for the S&P 500) for the quarter.

Within the Technology sector, semiconductors have driven both absolute performance and relative performance against the S&P 500 Index for 2023. Over the course of the year, NVIDIA has garnered significant investor attention as the best performing stock in QQQ, with a total return of 239.02%. In Q4, however, it was another group of chipmakers, Broadcom, Advanced Micro Devices and Intel that helped drive outperformance against the S&P 500 Index. Broadcom averaged a 3.28% weighting in QQQ (vs. an average weight of 1.06% in the S&P 500 Index) and finished Q4 with a total return of 35.01%. Advanced Micro Devices averaged a 1.56% weighting in QQQ for Q4 (vs. a 0.50% average weighting in the S&P 500 Index) and advanced by 43.37% in Q4. Lastly, Intel averaged a 1.40% weight in QQQ during Q4 (vs. a 0.45% weighting in the S&P 500 Index) and delivered a 41.82% total return in the final quarter of 2023. As demand for Artificial Intelligence (AI) powered capabilities & functions grew chipmakers benefitted. With that, investor attention has broadened out to other semiconductor companies not named NVIDIA.

QQQ’s underweight to the Energy sector was another driver of relative outperformance against the S&P 500 Index. QQQ held only 3 companies within the energy sector for an average weight of 0.62%, compared to the S&P 500 Index’s 26 Energy companies, comprising a 4.36% weighting in the Index. QQQ held Diamondback Energy at an average weight of 0.23%, which saw a total return of 2.30%. Baker Hughes comprised an average 0.28% weighting in QQQ and declined by 2.68% across Q4. QQQ’s final energy holding was Enphase Energy, which was removed from the portfolio at the time of the Nasdaq 100 Index’s annual reconstitution, effective before the open December 18.2 From September 30 through December 15, Enphase saw a total return of 3.14% and held an average weight of 0.10% in QQQ during Q4. The S&P 500 energy sector declined by 6.72% as oil prices slid from their late September peak, which represented the high price for 2023. The price of West Texas Intermediate (WTI) Crude Oil as measured by the WTI Cushing Oklahoma Crude Oil Spot Price, fell by 21.08% as concerns around the Chinese economy and mild weather have kept prices in check.3

Source: Bloomberg L.P., as of 12/31/2023. 
Note: All periods represent calendar years. Click for standardized performancePerformance data quoted represents past performance, which is not a guarantee of future results; current performance may be higher or lower than performance quoted. Investment returns, and principal value will fluctuate, and shares, when redeemed, may be worth more or less than their original cost. See invesco.com to find the most recent month-end performance numbers. Market returns are based on the midpoint of the bid/ask spread at 4 p.m. ET and do not represent the returns an investor would receive if shares were traded at other times. An investor cannot invest directly in an index. Index returns do not represent Fund returns. Invesco QQQ’s total expense ratio is 0.20%.

Annual reconstitution

Every year, Q4 brings the Nasdaq 100 Index’s annual reconstitution and on Friday, December 8th, Nasdaq announced the constituent changes for the Index. These changes became effective before market open on Monday, December 18th and Invesco QQQ Trust also reflected these changes before the open on the 18th as QQQ tracks the Nasdaq 100 Index.

The Nasdaq 100 welcomed six additions: Coca-Cola Europacific Partners PLC, CDW Corporation of Delaware, DoorDash, MongoDB, Inc, Roper Technologies, Inc. (ROP), Splunk Inc. (SPLK). Of the six, CDW Corporation and Splunk were previously members of the Nasdaq 100 Index, DoorDash, and Roper Technologies changed their listings from the New York Stock Exchange to Nasdaq in 202 and Coca-Cola Europacific Partners and MongoDB are first time members graduating from the Nasdaq Next Generation Index.

The Nasdaq 100 Index also gained an additional new member effective before market open December 18th, although the action was not a part of the annual reconstitution. After it was announced that Seagen Inc. was acquired by Pfizer Inc. on December 15, 2023, Take-Two Interactive (TTWO) was added to the Nasdaq 100 Index. Take-Two Interactive joined the Nasdaq 100 Index from the Nasdaq Next Generation Index and was previously a member of the Nasdaq 100 Index from December 2017 through December 2019.

Single stock performance

The best-performing stocks in QQQ for Q4 were CrowdStrike Holdings Inc (+52.54%), PDD Holdings Inc (+49.19%) and Advanced Micro Devices (+43.37). The worst performers for the quarter were Lucid Group Inc. (-15.38%), Align Technology Inc. (-14.29%) and Charter Communications Inc (-11.63%).

Market drivers during Q4

Q4 performance started off on shaky footing, but a strong November and December helped propel performance into year-end. Concerns around inflationary pressures from accelerating prices across Q3 weighed on equity markets to start the quarter. However, price data showed a reversal of that trend as the quarter progressed, and the Fed made no changes in its policy decisions.

During the quarter, the Federal Open Market Committee (FOMC) met twice, in October/November and December. As in September, the Committee kept its target rate steady for both meetings at 5.25 – 5.50%, the highest level in 22 years. The December meeting did give the market further insight on the Federal Reserve’s expectation as the Summary of Economic Projections were released.4 The Committee expects three rate cuts in 2024, one more than the previous projection in September.  The 2023 Gross Domestic Product (GDP) projection was raised to 2.6% from 2.1% in September while projections for future years were little changed.5 Additionally, the Fed’s 2023 inflation projection was revised down to 2.8% from the September expectation of 3.3%. 2024 and 2025 inflation expectations were also revised lower by 0.10% each to 2.4% and 2.1%, respectively. In his speech and press conference Chairman Jerome Powell noted that economic activity cooled off since Q3 and the labor market softened along with wage growth. The biggest takeaway was the expectation for no further rate hikes this cycle, after the release of the Committee’s expectation for rate cuts in 2024.

The Fed’s updated commentary coincides with the continued easing of prices in Q4. Over the summer, the Consumer Price Index (CPI), showed a year-over-year re-acceleration of prices from 3.0% in June to 3.2% in July and 3.7% in August.6 CPI releases in Q4 showed easing price growth with September holding the same 3.7% growth level as August followed by October year-over-year growth at 3.2% and November growth at 3.1%. The Producer Price Index followed suit, with slowing year-over-year growth in the October and November readings after an acceleration in year-over-year growth in June, July, August and September.7

Federal Funds Target Rate Mid Point of Range 12/31/2022 - 12/31/2023

Source: Bloomberg L.P., as of 01/06/2024

2023 Year-in review

2023 was a banner year for QQQ, as the fund enjoyed the best calendar 1-year return in its history. QQQ’s total return of 54.76% (on an NAV basis) beat its previous top performing calendar year of 2009 where it returned 54.45% (on an NAV basis). QQQ outperformed the S&P 500 Index’s total return of 26.26% by 28.5 percentage points. QQQ’s two largest sectors (by weight) were the best performing in QQQ (as well as the S&P 500) and were the largest contributors to both absolute annual performance as well as relative outperformance against the S&P 500 Index. The Technology Sector with an average weight of 58.41% for 2023 saw total return of 76.72%, while the Consumer Discretionary sector averaged a 18.93% weighting for 2023 and advanced by 60.47%.

QQQ started the year reversing 2022’s trend, which brought a NAV total annual return of -32.49% as investors grappled with climbing inflation, the start of the Fed’s rate hiking cycle and geopolitical issues. January 2023 saw QQQ advance by 10.64% NAV, outperforming the S&P 500 index’s return of 6.18% by 4.46%. Many of the stocks that were under considerable pressure in 2022 bounced back to start the year: NVIDIA (down 50.27% in 2022) advanced by 33.69%, Meta Platforms (down 64.22% in 2022) saw a 23.79% total return, Tesla (down 65.03% in 2022) moved higher by 40.62% and Amazon (down 49.62% in 2022) jumped by 22.77%. January’s return trend held over the course of 2023 for these QQQ heavyweights as all four names were among the top 15 best performing stocks in QQQ for the year. NVIDIA finished 2023 as the best performing stock in QQQ, and the largest contributor to both absolute performance and relative outperformance against the S&P 500 Index. The semiconductor giant advanced by 239.02%. Meta Platforms saw a 194.13% total return, Tesla advanced by 101.72% and Amazon jumped by 80.88%. 

Throughout Q1 and Q2 markets saw the Fed’s progress against inflation as year-over-year price gauges (i.e. Consumer Price Index) showed slowing year-over year growth in monthly readings.  The Fed continued its fight against rising prices by hiking rates three times during the first half of 2023, in February, March, and May. June brought the fed “pause” which represented the first meeting since March 2022 in which the FOMC decided not to raise rates. The Fed met again in July and added another rate hike, while forecasting one additional hike before year-end. Ultimately, the July hike was the last one for 2023 as the Fed’s target rate remained at 5.25% -5.50% through the September, November and December meetings.

Perhaps the biggest story of the year was the arrival of AI. Upon the release of ChatGPT, an AI-powered chatbot, by openAI in November 2022, interest around artificial intelligence began to surge as users flooded the platform. As other AI-enabled chatbots were released in the months following, companies and investors alike sought ways to gain exposure to the power of generative artificial intelligence. While AI had been discussed for years prior, 2023 was the year in which demand began to transform company results. NVIDIA’s Q1 earnings report, released on May 24th was one of the launch points, as the company beat analysts’ expectations for earnings per share (EPS) and revenue, but provided sales guidance for Q2 of ~$11 billion, 53% higher than the average analyst forecast of ~$7.2 billion.8 Three months later, Q2 revenue was reported higher than initially forecast, at $13.51 billion which represented 102% year-over-year revenue growth. In that release, the company authorized a $25 billion share repurchase program and provided Q3 revenue guidance of ~$16 billion. In November, once again, NVIDIA posted a Q3 beat with revenue of $18.12 billion. Over the course of 2023, NVIDIA emerged as perhaps the biggest AI player in the market and showed how demand for AI capabilities can rapidly transform a company’s business results.

Outlook

After a record 2023, markets wonder, where do we go from here? As has been the case for the past two years, investors remain keenly interested in Fed policy. In Q1 2024, the FOMC is scheduled to meet twice, on January 30-31 and March 19-20. At the time of writing, Fed Funds Futures are pricing in a ~68% chance of a cut by the March meeting.9 Chairman Powell has been fairly deliberate in reiterating that the Committee will be data dependent. Markets will likely pay close attention to economic releases relating to prices (CPI, Producer Price Index, etc.) and the labor market for insight around how the Fed may act at each of their 2024 meetings. While the Fed has projected three rate cuts in 2024, Chairman Powell left the option for additional tightening on the table.

Earnings is always a key focus, particularly with some of QQQ’s largest holdings. As has been the case for the past three quarters, NVIDIA’s earnings release scheduled for late February will be closely watched. The company has become an AI-bellwether of sorts, and if NVIDIA can continue its torrid pace of sales and earnings growth on the back of AI-related demand for its chips, it could set the stage for broad investor interest across the AI landscape. Additionally, Apple is scheduled to report Q4 earnings in the first week of February and is QQQ’s largest holding at the time of writing. The Q4 earnings report will give a look at the state of iPhone sales & demand amid slowdown worries stemming from China. Over the course of the second half of 2023 the Chinese government, state owned enterprises, local governments and more, instructed workers to not use iPhones in the workplace. China has been an important market and growth driver for Apple, so business results and any impact from this action will likely be scrutinized in the earnings report.

Footnotes

  • 1

    The Federal Open Market Committee (FOMC) is a 12-member committee of the Federal Reserve Board that meets regularly to set monetary policy, including the interest rates that are charged to banks.

  • 2

    The Nasdaq-100 is a stock market index made up of equity securities issued by 100 of the largest non-financial companies listed on the Nasdaq stock exchange.

  • 3

    West Texas Intermediate (WTI) crude oil is a specific grade of crude oil and one of the main benchmarks in oil pricing.

  • 4

    The Summary of Economic Projections is a quarterly report published by the Federal Reserve, which compiles the economic forecasts of the members of the Federal Open Market Committee.

  • 5

    GDP measures the monetary value of final goods and services produced in a country in a given period of time.

  • 6

    The Consumer Price Index (CPI) measures the average change in prices over time that consumers pay for goods and services.

  • 7

    The Producer Price Index measures the average change over time in selling prices received by domestic producers of goods and services.

  • 8

    Earnings per share is the monetary value of earnings per outstanding share of common stock for a company.

  • 9

    Fed fund futures are derivatives based on the federal funds rate, the U.S. overnight interbank lending rate on reserves deposited with the Fed.

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