Some investors often have a hard time seeing the forest through the trees, and that’s particularly true this year. Macroeconomic issues such as persistent inflation, rising interest rates, and recession speculation are taking tolls on investors’ psyches, and that’s understandable. Specific to inflation, it’s causing the Federal Reserve to aggressively hike interest rates. In turn, it’s causing the allure of growth stocks, including plenty residing in exchange traded funds such as the Invesco QQQ Trust (QQQ) and the Invesco NASDAQ 100 ETF (QQQM), to struggle because higher rates diminish the allure of growth companies’ future cash flows.
Translation: With inflation being at its highest levels in four decades, investors may be quick to dismiss ETFs such as QQQ and QQQM, but now may be the time to revisit these products.
“With infrastructure now at the forefront of the political landscape and the cost of labor and capital on the rise, corporate investments are likely to pivot toward productivity enhancement and technologies that can lower the cost of doing business,” said Josh Pokrzywinski, U.S. electrical equipment and multi-industry analyst at Morgan Stanley Research. “We believe companies that provide innovative and cost-effective solutions will see heightened demand and greater competitive advantages in their respective industries.”
Many of the components in QQQ and QQQM (the ETFs’ lineups are identical) are purveyors of products and services that help clients boost efficiencies and drive down costs — the latter of which is clearly a desirable trait in inflationary environments. That went overlooked when deflation set in and inflation was low during much of the previous growth stock-led bull market.
“While technology has had a profound influence on cost reduction for many years, its impact was overshadowed by decades-long deflation, driven by the overarching factors of slower demographic growth and globalized manufacturing,” added Morgan Stanley.
While recent earnings reports and outlooks from some marquee members of the Nasdaq-100 Index (NDX) — the underlying benchmark for QQQ and QQQM — cast a somber tone, these remain quality, wide moat companies with compelling long-term potential.
“All told, we believe the incentives are now in place for organizations to refocus their efforts on automation and productivity-driving technologies,” said Pokrzywinski. “The companies that can deliver such solutions for customers are more likely to profit from the higher prices and more volatile economic environment that we expect over the next decade, offering a relatively attractive risk-to-reward investment proposition.”
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
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