QQQ quarterly outlook report

QQQ Q2 Performance

Invesco QQQ ETF (QQQ) extended its streak of positive quarterly total return performance to three consecutive quarters. The fund advanced by 7.98% for the quarter (on an NAV basis, 03/31/2024 – 06/30/2024) and outperformed the S&P 500’s total return of 4.28% by 3.70%. For the year, QQQ is also outperforming the S&P 500 index by 2.05% and has a total return of 17.34% vs. the S&P 500 Index’s total return performance of 15.29%. The fundamental growth picture within the Nasdaq 100 remained positive, led by encouraging earnings reports from most of the “Magnificent 7” companies.¹ Forward guidance remained in focus and those companies that raised estimates for future results were mostly rewarded by market participants. Despite some faster than expected inflation readings early in the quarter, price readings began to moderate as the quarter progressed. The Federal Open Market Committee (FOMC) elected to keep its target rate steady and decreased the expectation for rate cuts in 2024, though the move was largely anticipated by the market.²

QQQ’s overweight exposure to the Technology sector and overweight exposure and outperformance within the Consumer Discretionary sector (per Industry Classification Benchmark- ICB) were the largest contributors to relative performance against the S&P 500 Index.³ Technology averaged a 59.89% weighting in QQQ (vs. 35.51% in the S&P 500) and advanced by 12.52% (vs. 14.50% in the S&P 500) for the second quarter. The Consumer Discretionary sector averaged an 17.67% weighting in QQQ (vs. a 13.82% weighting in the S&P 500 Index) and advanced by 5.86% (vs. +0.82% in the S&P 500) for the quarter.

The three best performing stocks within QQQ for the quarter were within the Information Technology sector. NVIDIA was the best performing stock in QQQ, up 36.74% in Q2 and enjoyed its best performance day after the release of its Q1 earnings report. The stock surged by over 9.3% after reporting adjusted earnings per share (EPS) of $0.61, that beat analysts’ expectations of $0.56 by 8.51%.⁴ The company also reported revenue of $26.04 billion, 5.5% better than analysts’ projections of $24.69 billion. Revenue guidance for Q2 of $28 billion also topped forecasts for $26.62 billion During the quarter, NVIDIA shares underwent a 10 -for-one split effective June 10^th and the quarterly dividend was raised to $0.10 per share (up from $0.04) on a pre-split basis; which equated to a $0.01 dividend on a post-split basis. CEO Jensen Huang, when discussing the widespread adoption of AI powered by NVIDIA chips, noted that “we are at the beginning of a new Industrial Revolution.” QQQ averaged a 6.95% weighting to NVDA vs. a 5.64% weight in the S&P 500 Index.

Apple was the second best-performing stock in QQQ up nearly 23% for Q2 driven by a solid earnings report and a few weeks later, the announcement of its AI platform. Apple reported earnings per share and revenue on May 3^rd that beat analysts’ expectations by 1.86% and 0.47% and noted that the board had authorized a $110 billion share repurchase program, the largest in Apple’s history. In the trading session immediately following the earnings release, shares traded higher by nearly 6%. Later in the quarter, Apple held its Worldwide Developer Conference where it announced its highly anticipated AI platform called Apple Intelligence. Alongside the platform, Apple announced a partnership with OpenAI that will bring ChatGPT to Apple devices. In the session following the announcement, Apple shares enjoyed their best performance day of the year, moving higher by 7.26%. Apple averaged a 7.93% weighting in QQQ for the quarter vs. 6.12% in the S&P 500 Index.

Lastly, Broadcom was the third best performing stock in QQQ, ending the quarter higher by 21.53%. The company was the largest relative contributor to outperformance against the S&P 500 as it averaged a 3.23% overweight position (4.63% in QQQ vs. 1.40% in the S&P 500 Index). Broadcom was also propelled by an earnings report that showed a 1.46% upside surprise to adjusted EPS and a 3.56% upside surprise to revenue compared to analysts’ estimates. Investors seemed encouraged by the $3.1 billion revenue from AI products during the quarter and revised revenue guidance for 2024 AI semiconductor revenue. The company now expects $11 billion in revenue, up from the previous forecast of $10 billion and raised its total revenue projection for the year by $1 billion to $51 billion. The company also announced a 10-for-one stock split, which will become effective on July 15^th. Shares of Broadcom surged by over 12% in the trading session immediately following the earnings announcement, the best day of performance in the quarter.

The Consumer Discretionary sector also aided relative performance against the S&P 500 Index. Performance for 2024 through April 23^rd, the session before the earnings announcement, had been challenged, with shares of Tesla lower by nearly 42%. Concerns around weakening demand and its effect on earnings has weighed on the stock. The company’s Q1 earnings announcement on April 24^th marked the third consecutive quarter that earnings per share had declined on a year-over-year basis and adjusted EPS and revenue both missed analysts’ projections. Investors did find a silver lining in the announcement, as the company discussed new models, including a low-price offering that could be manufactured later this year or by 2025. Tesla also touted its AI capabilities, particularly in the realm of self-driving autos and has been in talks to license its software to a major automaker. The company teased a robot taxi hailing service which they will discuss in further detail later this summer. In the session immediately following the earnings announcement, Tesla shares jumped by over 12%, their best performance day for 2024.

New Addition

Over the course of the quarter, one company was deleted from the Nasdaq 100 Index (and QQQ) and one company was added to the index (and QQQ). Sirius XM Holdings 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 June 24^th, Sirius XM Holdings was replaced in the Nasdaq 100 Index (and QQQ) by ARM Holdings PLC, the semiconductor design and manufacturing company. ARM listed its initial public offering on the Nasdaq Exchange in September 2023.

Single stock performance

The best-performing stocks in QQQ for Q1 were the aforementioned NVIDIA Corp (+36.74%), Apple Inc. (+22.99%) and Broadcom Inc. (+21.53%). The worst performers for the quarter were Walgreens Boots Alliance Inc. (-43.45%), MongoDB Inc. (-30.30%) and Sirius XM Holdings Inc (-30.07%).

Market drivers during Q2

The second quarter had a challenging start with negative performance for both QQQ (-4.45%) and the S&P 500 Index (-4.08%). May and June performance reversed course as more earnings reports were released and the Consumer Price Index (CPI) readings began to ease from an unexpected acceleration in April.⁵

Price gauges remained in focus as investors along with the Federal Reserve looked for indications that inflation continued to ease. Q2 brought three monthly releases for CPI, measuring prices for March (released in April), April (released in May) and May (released in June). The March reading came in hotter than expected at a 3.5% year-over-year growth rate vs. estimates for 3.4% and higher than the February reading of 3.2%. The Core reading (which excludes the volatile food and energy components) was reported at 3.8%, matching the February figure and higher than expectations of 3.7%. The subsequent readings for April and May showed price pressures eased with the CPI year-over-year figures declining to 3.4% and then 3.3% and the Core CPI readings decreasing to 3.6% and then 3.4%.

The Federal Open Market Committee (FOMC) met twice in Q2, in May and June. In both meetings the FOMC kept its rate target steady for the sixth and seventh consecutive meeting at 5.25% - 5.50%, where it has remained since July 2023. The May meeting brought an update on the pace of the Federal Reserve’s balance sheet runoff rate. The Fed announced that it would decrease the monthly redemption cap of Treasury securities to $25 billion (down from $60 million) and would continue its pace of agency and mortgage-backed security redemption cap at $35 billion per month.⁶ Those changes were implemented on June 1. The June Federal Reserve meeting brought an update to the Summary of Economic Projections. Estimates for 2024 inflation readings were raised modestly, with Personal Consumption Expenditures Price Index (PCE) inflation now projected at 2.6% (up from 2.4% in March) and Core PCE inflation now projected at 2.8% (up from 2.6% in March).⁷ The updated release of the Fed’s dot plot showed that the median FOMC member now anticipates one rate cut for 2024, down from three cuts in the March report.⁸ The reduction in anticipated rate cuts was largely expected by market participants and equity markets finished in positive territory on the day of the release as well as the following session. The Fed also reiterated the decreased rate of its balance sheet runoff that was outlined in the May meeting.

Attention has remained on the Magnificent Seven companies (Alphabet, Amazon.com, Apple, Meta, Microsoft, NVIDIA and Tesla) particularly around earnings season. This past quarter, six of the seven companies exceeded analysts’ expectations for EPS and revenue with Tesla being the one disappointment. Broadly, the Nasdaq 100 Index has delivered solid fundamental growth; over the last three quarters, earnings have grown on a year-over-year basis by at least 23%, and by over 30% the last two quarters. Revenue over the previous three quarters has grown by at least 16% on a year-over-year basis.

Outlook

The continued focus of inflation the Fed’s policy response is not likely to change anytime soon. Particularly as concerns of a reacceleration in inflation readings may be a precursor to the Fed turning more hawkish in the form of delayed interest rate cuts, or even future hikes. The FOMC is scheduled to meet twice during the quarter, first on July 30-31 and again from September 17-18. At the time of writing (July 1), market participants, through Federal Funds futures, are projecting an 8.5% chance of a rate cut at the July meeting and a 63.5% chance of a rate cut at the September meeting. These percentages are market driven and can (and usually will) change on a daily basis. Releases of price gauges such as CPI, Personal Consumption Expenditure, Producer Price Index and others have been monitored closely by market participants and can drive changes in expectations for Fed policy.⁹ Of course, commentary from Fed officials, whether at scheduled meetings or events, interviews, etc. will be scrutinized for clues about monetary policy changes and/or timing.

As 2024 progresses closer to November market volatility may increase ahead of the Presidential election. Uncertainty around policies whether it be on the political front, economic front or other can drive swings in shorter term volatility. Ultimately, we believe that investment performance is driven by the health of the underlying economy along with the fundamental strength of companies.

Earnings is always a key focus, particularly with the largest QQQ holdings. NVIDIA’s earnings release continues to be one of the market’s most followed events and the company is expected to report Q2 earnings in mid to late August. Fundamental growth for the company along with any forward guidance will be scrutinized ahead of the company’s highly anticipated release of Blackwell group processors in Q4 of this year. Attention has remained on the Magnificent Seven companies, particularly around earnings season. We continue to also watch Broadcom earnings as it represents the largest overweight security (as of June 30) in QQQ relative to the S&P 500 Index at a 4.99% weight in QQQ vs. a 1.52 weight in the S&P 500 Index for a 3.47% overweight. The chipmaker is expected to report in late August.