2023-05-19 04:59:10 ET
Summary
- The current uptrend in Invesco Nasdaq 100 ETF does not appear to be a bear market rally because it is supported by fundamental factors rather than speculation.
- The potential shift in Fed tightening policy, soft landing, and higher-than-expected earnings are likely to support the uptrend.
- QQQM is a top bet for investors aiming to capitalize on a potential bull market as it emphasizes only 100 large-cap stocks from the tech-heavy NASDAQ index.
Following a year marked by gloomy reports and negative events, market fundamentals began to favor high-beta stocks and ETFs such as the Invesco Nasdaq 100 ETF ( QQQM ), owing to the declining risk of a severe recession and the Fed's pivot. The market has begun to recognize that the Federal Reserve's rate hike policy, which it began implementing last year, will be revised soon. This is because the Fed has successfully slowed the economy and cooled inflation without causing the economy to enter a deep recession. Furthermore, higher-than-expected earnings from mega-cap tech companies would support the continuation of the uptrend in high-beta ETFs. Therefore, the current uptrend appears to be a solid bull run rather than a bear market rally.
It's Not a Bear Market Rally
A bear market rally is a temporary price increase that occurs during a bear trend. It begins abruptly and ends quickly with a price increase between 10% and 20%. In 2022, there were a few bear market rallies for both the Nasdaq 100 ETF and the broader market index. However, the uptrend that began in early 2023 does not appear to be a bear market rally because the upside is supported by fundamental factors rather than speculations. Furthermore, QQQM's share price collapse of 35% in 2022 indicates that the ETF has already factored in the effects of rate hikes, a slowing economy, and earnings declines.
On the other hand, it appears that QQQM's shares are about to embark on a strong bull run. After a surge of over 25% from recent lows, the ETF has technically been in bull territory. The Fed's rate hike policy, which was a major contributor to the 2022 bear market, has reached its apex, with a pause expected in June. According to CME data , 90% of traders anticipate a rate cut in the second half. The stress in the financial sector increased the likelihood of a cut . Goldman Sachs says financial sector stress could have the same economic impact as a quarter percentage point increase. Furthermore, falling inflation has increased the expectations for a rate cut in the second half. Inflation fell to its lowest level in two years in April, with further declines expected in the coming months due to falling commodity prices .
Unemployment rate (fred.stlouisfed.org)
Fortunately, all of this has been accomplished without severely depressing the economy. Given the rapid decline in the unemployment rate, which is now close to its lowest point in 53 years, there is little chance of a recession. Even though job growth has slowed in the last two quarters, the United States is still adding jobs at a faster rate than before the pandemic. In April, nonfarm payrolls increased by 253,000, beating Wall Street estimates for growth of 180,000. Declining inflation with a minor impact on employment suggests that the Fed is on track for a soft landing, which may be the best scenario for growth stocks to extend their uptrend. Actually, it appears to be the beginning of a bull market that will most likely last longer.
S&P 500 surge in subsequent year after bear market (rbcgam.com)
History also shows that after every bear market, stocks always experience long-lasting bull runs. Furthermore, bear markets last only 1.3 years on average, with a 38% cumulative loss. The graph above demonstrates the pattern that whenever the market has experienced a significant decline, the subsequent year's recovery has also been substantial.
Why QQQM?
QQQM holding breakdown (Seeking Alpha)
To take advantage of the potential bull run, it might be smarter to include Invesco Nasdaq 100 ETF in a portfolio as opposed to investing in a single tech, communication, or consumer cyclical stock. The Invesco Nasdaq 100 ETF provides diversification across a number of sectors, with a particular emphasis on high beta technology, communication services, and consumer cyclical sectors.
QQQM Price Change Vs. Peers (Seeking Alpha)
QQQM appears to be a better choice than growth ETFs like Vanguard S&P 500 Growth Index Fund ETF Shares ( VOOG ) and Schwab U.S. Large-Cap Growth ETF ( SCHG ) because it only invests in the top 100 Nasdaq-listed companies, with the majority of them in the cyclical tech, communications, and consumer sectors. So far this year, the emphasis on only 100 large caps has helped it outperform growth ETFs. VOOG and SCHG, on the other hand, cover around 250 growth stocks, including non-profitable mid-caps that are still vulnerable to volatility. In the last two years, there has been a significant disparity in returns between larger and non-profitable tech stocks. Due to mid and small-caps' high sensitivity to economic stability, declining earnings, and diminishing cash reserves, the dispersion still exists. For instance, compared to a gain of over 25% for the Nasdaq 100 so far in 2023, the WisdomTree Cloud Computing ETF ( WCLD ) and Global X FinTech Thematic ETF ( FINX ), which both include a sizable number of mid-cap tech stocks, are up 12% and 6%, respectively.
Quantitative analysis also suggests that QQQM is a better choice when compared to other high-beta growth stocks. The ETF received a strong buy rating with a quant score of nearly 4.70, owing to high marks for momentum expenses and liquidity. VOOG has a quant score of 4.16 while SCHG is closer to QQQM's quant score. Mid-cap EFTs like the Global X FinTech Thematic ETF ( FINX ) and WisdomTree Cloud Computing ETF ( WCLD ) are still rated as a sell.
Earnings Surprise
According to FactSet data , earnings for the S&P 500 declined by 2.5% in the first quarter as opposed to the over 6.7% decline predicted by Wall Street. The data also shows that the S&P 500's earnings declined less than expected in the first quarter due primarily to higher-than-expected earnings from the information technology and consumer discretionary sectors. In fact, when we take a closer look, we find that the S&P 500's lower-than-expected earnings decline was primarily driven by mega-cap tech and consumer cyclical companies. For instance, Microsoft ( MSFT ) ($2.45 vs. $2.24), Apple ( AAPL ) ($1.52 vs. $1.43), and Intel ( INTC ) (-$0.04 vs. -$0.16) all have surprised on their earnings per share, which has significantly slowed the index's earnings decline. Amazon’s ( AMZN ) earnings per share surprise ($0.31 vs. $0.21) was also a significant contributor to the overall sector and S&P 500’s performance. When Amazon is taken out of the equation, the consumer cyclical sector's first-quarter earnings growth rate falls to 15% from 53.6%. Similarly, earnings surprises from Alphabet ( GOOG ) ( GOOGL ) and Meta Platforms ( META ) have also played a role in lowering the S&P 500’s earnings decline.
In Conclusion
Investors who missed the early 2023 buying opportunity still have time to capitalize on the uptrend because markets are expected to build a solid uptrend in the second half of 2023 when interest rates begin to fall and economic growth accelerates. There are a number of growth ETFs that appear to be solid, but Invesco Nasdaq 100 ETF looks like a solid bet to fully benefit from the potential bull market. This is due to its high beta and emphasis on mega and large-cap stocks in the technology, consumer cyclical, and communications sectors.
For further details see:
QQQM: It's Bull Run, Not A Bear Market Rally