QQQ Quarterly Outlook Report

Market Performance

Invesco QQQ ETF (QQQ) returned 1.04% in Q3 (on an NAV basis, 6/30/2021 – 9/30/2021) and outperformed the S&P 500 by 0.46% which returned 0.58%. Although this quarter started with growth-oriented stocks outperforming, volatility moved back into the market causing these same stocks to underperform in September. The main drivers of QQQ’s relative outperformance versus the S&P 500 in Q3 were its underweight allocation and differentiated holdings in Industrials, along with its differentiated holdings in Health Care and Consumer Staples. Overall, Health Care was the best performing sector in QQQ (+5.01%), followed by the Consumer Staples (+1.78%) and Communication Services (+1.56%) sectors. In contrast, Financials was the best performing sector in the S&P 500 (+2.74%), followed by the Utilities (+1.74%) and Communication Services sectors (+1.63%).

QQQ’s Industrials exposure had an average weight of 2.51% during the quarter and was down 3.07%. However, it did outperform the S&P 500’s Industrials return of -4.28%. The combination of the sector’s underweight and relative outperformance made it the largest contributor to the fund’s outperformance versus the S&P 500 for the quarter. QQQ had more exposure to companies like Verisk Analytics, a research and consulting services firm, and Copart Inc., an automotive wholesaler. QQQ also lacked exposure to many industrial companies that provide goods, such as Stanley Black & Decker Inc., a hand and power tool company, and Boeing, an aircraft manufacturer. This disparity within the Industrials sector displayed the supply chain issues that have been affecting both the US and Global economy. Slowdowns in manufacturing due to COVID-19 have disrupted supplies from automobiles to semiconductors. This has caused companies to have lower inventories and many have been unable to meet rising consumer demand. Because they are not as reliant on goods to generate revenue, service focused companies have performed better. Service-based companies, however, did face their own challenges such as labor shortages with workers still slow to return to work.

Continuing its strong performance from Q2, Health Care was the best performing sector in QQQ. Moderna was once again the best performer in the Health Care sector with a total return of 63.78% and an average weight of 1.02%. Year-to-date, Moderna has returned 268.39%, making the COVID-19 vaccine maker the top performer in QQQ. In 2021, Moderna has outpaced the next top two performers combined, Devon Energy Corp (+124.60%) and Bath & Body Works Inc. (+109.71%). Moderna has been at the forefront of the fight against COVID. Per the CDC, the company has administered over 153 million vaccine doses in the US, nearly 38% of all vaccines given in the domestically. Also assisting the company’s stock performance was its inclusion into the S&P 500 Index. Moderna joined the index on July 21st and was quickly added to many funds that track the S&P 500, giving performance an additional boost . For reference, Moderna was added to the NASDAQ 100, the index that QQQ replicates, in July of 2020, and has returned 365.48% during its tenure.

Consumer Staples also performed well in QQQ for the month of September, led by Costco Wholesale Corp. Costco is the well-known membership warehouse retailer and returned 13.78% for the quarter with an average weight of 1.36%. The company reported robust monthly sales in June and July which increased 16.9% and 13.8%, respectively, from the previous year. Costco also announced strong quarterly earnings in September of $3.90 earnings per share, beating estimates by 5.80%.

QQQ’s Information Technology exposure weighed on relative performance against the S&P 500. Concerns around valuation and rising interest rates were catalysts for investors to move out of names that had performed well since the start of the Pandemic. Despite having strong earnings announcements and beating analysts’ expectations during the quarter, future growth of companies like Zoom Video Communications and DocuSign Inc. were in focus as more people will likely be returning to office. Micron Technology, the largest US memory chip maker, also detracted from the sector’s performance as it provided a lower-than-expected revenue forecast at the end of September. CEO Sanjay Mehrotra outlined that the increased costs Micron has been facing may not ease for the foreseeable future. Moreover, these cost increases “Will be reflected in our pricing, even as we remain committed to a competitive, value-based pricing approach with all our customers.”

^{Source: Bloomberg L.P., as of 9/30/2021. 
Note: All periods represent calendar years. Click 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. High, double-digit and/or triple-digit returns are highly unusual and cannot be sustained.}

Single Stock Performance

The best-performing stocks in QQQ for Q2 were Moderna Inc. (+63.78%), Atlassian Corp. PLC (+52.39%) and Dexcom Inc. (+28.07%). The worst performers for the quarter were Zoom Video Communications (-32.43%), Peloton Interactive (-29.81%) and Pinduoduo Inc. (-28.62%). 

Market Drivers & Outlook

While concerns over the resurgence of COVID-19, specifically the contagious Delta variant, rose in the months of June, July, and August, reported infections began to flatten towards the end of September. Weekly total confirmed cases in the US at the end of September stood at 488.2 thousand, down from the peak at the beginning of the month of 1.2 million. As of the end of September, there had been over 43.4 million confirmed cases in the US and 233.7 million globally. Cases of vaccinated individuals contracting COVID-19 gave rise to discussions of boosters being administered for those who have already been inoculated. The CDC announced that individuals who received the Pfizer-BioNTech vaccine were eligible to receive booster shots if they are over the age of 65 or immunocompromised.

The Federal Open Market Committee (FOMC) met twice during the quarter along with the annual Jackson Hole Economic Symposium hosted by the Federal Reserve Bank of Kansas City. Although inflation reached its highest level since the Global Financial Crisis with the Consumer Price Index (CPI) reading 5.3% year-over-year, the Fed maintained that the high level of inflation would be transitory and moderate in 2022. After the September FOMC meeting, the market saw a steepening of the yield curve with long term rates rising. The 10yr US Treasury rose to 1.53%, the highest it had been since June, before settling at 1.49%. The sell-off of longer-term Treasuries, causing rates to rise, followed remarks from Fed Chairman Jerome Powell who stated that the Fed could start tapering its $120 billion per month asset purchase program later this year, and could conclude as early as mid-2022. Some market participants took the mid-2022 end of tapering timetable as a sign that the Fed may begin raising rates at some point in 2022. As expected, the yield curve steepened with longer term yields rising.

^{Source: Bloomberg L.P., as of 9/30/2021}

As previously mentioned, supply chain issues continue to affect many industries’ ability to meet consumer demand. Companies that rely on parts from overseas have been faced with slow deliveries and rising shipping costs. The rate to ship a 40-foot container, as measured by World Container Index (WCI) Composite Container Freight Benchmark, has been steadily rising since April and peaked in September Specifically, the cost to ship a 40-foot container has jumped by 108%, while a large backlog of container ships waiting to unload at some of the country’s largest ports, has exacerbated supply chain issues. Much of this has been attributed to labor shortages and the lack of skilled workers needed to operate the machinery to unload the container ships. In response to these ongoing problems, companies have issued guidance that they are taking measure to control costs, switch suppliers and potentially raise prices.

Apple, Microsoft, Amazon, Alphabet and Facebook will all report earnings in the last week of October while Tesla will report the week prior. In the most recent round of quarterly earnings (announced in July), these companies continued the strong earnings per share (EPS) trend as seen in the prior quarters. All the above-mentioned names beat estimates, with Tesla posting the largest surprise to the upside. The electric vehicle company reported $1.036 EPS which was 48.87% above the estimate of $0.974 EPS. 2022 EPS estimates for the NASDAQ 100 have been revised up nearly 18% YTD, from $497.66 to $586.16, possibly indicating that QQQ may offer potential growth going into next year.

During the last quarter of 2021, there will be a few key areas that investors may want to watch. Energy prices have been rising across the globe. Brent and crude oil have risen above $75 per barrel and it will be important to see how these rising costs may affect companies. Also, supply chain and labor shortages will be in focus during earnings calls. How companies are adjusting and the guidance they give surrounding these headwinds may offer insight into how transitory the rising prices of goods are.

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