QQQ Quarterly Outlook Report

QQQ Quarterly Outlook Report

Blog Author

Ryan T. McCormack

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Talking Points

1

QQQ outperforms S&P 500 in Q4 and for 2019.

2

Overweight sectors- Information Technology, Communication Services and Consumer Discretionary- continue to drive QQQ outperformance.

Market Performance

QQQ finished a very strong 2019 by outperforming the S&P 500 Index in the fourth quarter by 3.85%, with a total return of 12.91% vs. the S&P 500’s total return of 9.06%. For the year, QQQ’s total return of 39.13% beat the S&P 500’s total return of 31.48% by 7.65%. The main driver of QQQ’s relative outperformance for both the fourth quarter and 2019 was the fund’s three largest overweight sectors; Information Technology, Communication Services and Consumer Discretionary. QQQ’s exposure to Information Technology is 46.42% vs. 22.47% for the S&P 500 with the sector advancing by 17.22% in QQQ and 14.40% in the S&P 500. Specifically, QQQ’s overweight to Apple (up 31.50% for Q4) was the largest contributor to both sector and fund relative outperformance as the tech giant traded steadily higher throughout the quarter. The biggest highlight came after the company’s better-than-expected Q4 earnings release on October 30th, with Apple shares trading higher by 5.85% over the subsequent three trading sessions. The company announced earnings per share at $3.03 vs. the average analyst estimate of $2.84 for a ~6.7% surprise to the upside while Q4 revenue also surprised to the upside at $64 billion vs. estimates of $63.01 billion. QQQ’s next largest overweight, Communication Services (21.46% weighting in QQQ vs.10.42% in the S&P 500) was also the next largest contributor to performance after trading higher by 10.87% in QQQ vs. 9.01% in the S&P 500. The sector was led by shares of Facebook, which rose by 15.26% for the quarter, fueled by the company’s Q3 earnings release on October 30th. Facebook reported Q3 earnings per share at $2.12 vs. the average analyst estimate of $1.91, good for a ~11% surprise to the upside and Q3 revenue also beat estimates at $17.65 billion vs. analysts’ estimates of $17.35 billion. Shares responded to the positive announcement by trading higher by 3.44% over the following three trading sessions. Lastly, QQQ’s overweight to the Consumer Discretionary sector (15.40% weighting in QQQ vs. 9.89% weighting in the S&P 500) also contributed significantly to Q4 performance as the sector advanced by 7.90% in QQQ vs. 4.48% in the S&P 500. Within the sector, Tesla and Amazon.com were the largest contributors to performance with shares of Tesla advancing by a staggering 73.67% for the quarter and Amazon.com shares gaining 6.45% over the course of the quarter. Positive catalysts for Tesla stock performance included better-than expected Q3 earnings released on October 23rd, higher global deliveries of Tesla automobiles and word that its Gigafactory in China is producing 1,000 cars per week helped propel the stock through worries around the expiring electronic vehicle tax credit, set to expire in 2020.

Invesco QQQ vs. S&P 500 Index

Invesco QQQ (NAV) S&P 500 Index 20 30 40 50 60 10 0 -10 % 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 54.40 26.40 19.90 15.10 3.40 2.10 18.10 16.00 36.60 32.40 19.10 13.70 9.50 1.40 7.00 12.00 32.70 21.80 -0.10 -4.40 39.10 31.50
S&P 500 Index Invesco QQQ (NAV) 20 30 40 50 60 10 0 -10 %
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 54.40 26.40 19.90 15.10 3.40 2.10 18.10 16.00 36.60 32.40 19.10 13.70 9.50 1.40 7.00 12.00 32.70 21.82 -0.10 -4.40 39.10 31.50
Source: Bloomberg L.P., as of January 8, 2020.
Note: All periods represent calendar years. Click here for standardized performance. Performance 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.

Market Drivers

For the vast majority of the quarter, headlines around a potential US-China trade war dominated investors’ attention and contributed to market volatility. The anticipation culminated in mid-December, when news of the US-China phase one trade deal buoyed markets. Major details centered around China increasing purchases of American goods by over $200 billion and agricultural products by $32 billion by 2021. The US canceled a 15% tariff on Chinese goods and will cut earlier tariffs imposed in half, while China canceled their tariffs initially proposed in retaliation. From an economic standpoint, the strong US consumer continued to propel markets higher. The final University of Michigan Consumer Sentiment (a monthly consumer sentiment index published by the University of Michigan) readings for October, November and December all increased month over month with the October release at 95.5 (up from 93.2 in September), November at 96.8 and December reported at 99.3. after the December 6th release of the preliminary release of the University of Michigan Consumer Sentiment reading which increased to 99.2 from 96.8. Additionally, strong holiday sales numbers from Mastercard SpendingPulseTM (which provides insights into overall retail spending trends across all payment types, including cash and check) showed a 3.4% increase year-over year, while online shopping sales grew by nearly 19%. Comments from Amazon.com (third largest holding in QQQ) also pointed to a strong holiday spending season as the online e-commerce giant said they had the best holiday sales season ever.

University of Michigan Consumer Sentiment Index 2019

88 90 92 94 96 98 100 102 Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec
88 90 92 94 96 98 100 102
88 90 92 94 96 98 100 102 Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec
Source: Bloomberg L.P., as of September 30, 2019.

Single Stock Performance

The best-performing stock for the fourth quarter was previously discussed Tesla, rising by 73.67%. Advanced Micro Devices and Align Technology followed, gaining 58.19% and 54.23%, respectively. The worst laggards for the quarter were Expedia Group, (-19.26%, Dollar Tree (-17.26%) and Hasbro (-10.74%).

Outlook

As we look ahead to 2020, investors’ focus will likely remain on the same topics that garnered most of the attention in 2019. First, any new developments surrounding US-China trade relations. Will each side hold up their respective ends of the trade deal? Will there be progress towards phase two of the trade deal? Will there be new pain points that need to be addressed? Next, US corporate earnings will probably continue to remain in the spotlight. Will we see accelerated, slowing or negative earnings growth as the bull market cycle continues to age? What will the answer to the pervious question do to US corporate profit margins? With many of QQQ’s largest holdings, which not coincidentally are some of the country’s largest companies, reporting earnings towards the end of January, we may have a clearer picture on the direction of corporate earnings for the upcoming year. Lastly, after three rate cuts by the Federal Open Market Committee (FOMC) in 2019, monetary policy will be closely watched. Most economists have surmised that the Fed will not take any action to the target rate in 2020. In its statement on December 11, the Federal Reserve noted that the labor market remains strong and that overall inflation is still running below their 2% objective. From the statement: “The Committee will continue to monitor the implications of incoming information for the economic outlook, including global developments and muted inflation pressures, as it assesses the appropriate path of the target range for the federal funds rate.

Important Information Disclosure
All data is from Bloomberg, L.P. as of January 8, 2020, unless otherwise noted.All returns are based off NAVInvesco QQQ top 10 holdings as of December 30, 2019: AAPL (11.6%), MSFT (10.7%), AMZN (8.1%), FB (4.4%), GOOGL (4.1%), GOOG (4.1%), INTC (3.0%), CMCSA (2.3%), CSCO (2.3%), PEP (2.2%)The Nasdaq-100 Index comprises the 100 largest non-financial companies traded on the Nasdaq.BPS: Refers to basis point which is a common unit of measure for interest rates and other percentages in finance.Holdings are subject to change and are not buy/sell recommendations.These comments should not be construed as recommendations. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.The opinions expressed are those of the author, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

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