QQQ quarterly outlook report

Performance Takeaways

• Invesco QQQ advanced by 4.07% on an NAV total return basis and outperformed the S&P 500® Index in Q4 2024.
• For 2024, QQQ saw an NAV total return of 25.60%, and outperformed the S&P 500 Index’s total return of 25.00%.
• QQQ’s overweight exposure and outperformance of the Consumer Discretionary sector and underweight exposure to the Health Care sector (per Industry Classification Benchmark- ICB) were the largest contributors to relative performance against the S&P 500 Index.¹

QQQ Q4 Performance

Invesco QQQ ETF (QQQ) extended its streak of positive quarterly total return performance to five consecutive quarters. The fund advanced by 4.87% for the quarter (on an NAV basis, 09/30/2024 – 12/31/2024) and outperformed the S&P 500’s total return of 2.39% by 2.48%. Five of the ten sectors (per Industry Classification Benchmark- ICB), that QQQ has exposure to, finished in positive territory for the quarter. Three sectors (Consumer Discretionary, Telecommunications and Information Technology) averaged more than 81% of weight in QQQ in aggregate for the quarter, and all three sectors advanced by over 4.0% for Q4.

QQQ’s overweight exposure and outperformance to the Consumer Discretionary sector and underweight exposure within the Healthcare sector (per ICB) were the largest contributors to relative performance against the S&P 500 Index. Consumer Discretionary averaged a 19.38% weighting in QQQ (vs. 14.38% in the S&P 500) and advanced by 19.69% (vs. +12.76% in the S&P 500) in the fourth quarter. Consumer Discretionary’s quarterly performance in QQQ represented the best performing sector in either QQQ or the S&P 500 Index. The Healthcare sector averaged an 5.56% weighting in QQQ (vs. a 10.30% weighting in the S&P 500 Index) and declined by 10.46% (vs. -10.38% in the S&P 500) for the quarter.

The largest individual and third largest individual contributors to QQQ’s absolute performance for Q4 were Tesla and Amazon.com, both Consumer Discretionary stocks. Tesla was not only the largest contributor to QQQ’s performance, but also the best performing stock in the portfolio, advancing by over 54% for Q4. Tesla’s best performance day for the quarter was its best single day performance in over 11 years and came on October 24th when shares of the electric vehicle carmaker surged by nearly 22% after the release of Q3 earnings. Adjusted earnings of $0.72 per share beat the average analyst estimate by 20.81%. Despite a revenue miss of around 1%, investors were encouraged by optimistic comments about future business results from CEO Elon Musk. Musk noted that his “best guess” for vehicle growth next year will be somewhere in the 20-30% range, better than the 6% year-over-year growth in vehicle deliveries for Q3. Attention continues to center around Tesla’s Cybercab after the company noted that riders will be able to hail driverless Cybercabs in California and Texas in 2025 and that Cybercab production would be at 2 million per year in the future. Q4 performance helped to offset a challenging start to 2024, which saw shares decline by over 29%. For the year, Tesla shares advanced by 62.52%. Amazon.com’s best performance day of the quarter came on November 1st, when shares advanced by 6.19% in the session immediately following the release of the company’s Q3 earnings report. Q3 earnings-per-share of $1.43 beat the average analyst expectation of $1.14 by over 25% and showed year-over-year growth greater than 52%. Revenue of $158.88 billion also surprised to the upside by ~1%, against the average analyst estimate of $157.33 billion and growing by ~11% year-over-year. Amazon Web Services was a bright spot, with revenue of $27.9 billion and 19% year-over-year growth, continuing a higher growth trajectory than the growth seen in 2023. The company’s outlook for Q4 earnings also exceeded expectations with the forecast for operating profit between $16 and $20 billion, with the midpoint of that range beating the average analyst estimate of $17.5 billion.

The Healthcare sector came under considerable pressure following the Donald Trump presidential election win. From the beginning of the quarter through election day (09/30/2024 – 11/05/2024) the Healthcare sector was lower by 2.17% in QQQ and 4.05% in the S&P 500 Index. From election day through the end of the quarter the Healthcare sector was lower by 8.48% in QQQ and lower by 6.59% in the S&P 500. Trump’s rumored (and subsequently confirmed) appointment of Robert F. Kennedy Jr. as the Secretary Health & Human Services of weighed on drugmakers. His stance as an opponent to vaccines and pharmaceuticals raises concerns around how he may try and change the healthcare system.

Single Stock Performance

The best-performing stocks in QQQ for Q4 Telsa, Inc. (+54.36%), Marvell Technology Inc. (+53.27%) and Atlassian Corp. (+53.25%). The worst performers for the quarter were Moderna Inc. (-40.76%), Regeneron Pharmaceuticals Inc. (-32.24%) and Microchip Technology Inc. (-28.08%).

Annual Reconstitution & a New Addition

On Friday, December 13th, Nasdaq announced the constituent changes for the Nasdaq 100® Index which become effective before market open on Monday, December 23rd. QQQ also reflected the changes before the open on the 23rd. The 2024 annual reconstitution brought three new names into the Nasdaq 100 Index (and QQQ): Palantir Technologies Inc., MicroStrategy Inc. and Axon Enterprise Inc. They replaced Illumina Inc., Moderna Inc. and Super Micro Computer.

Additionally, The Nasdaq 100 Index (and QQQ) gained a new member approximately a month before the annual reconstitution, effective before the open on November 18th. DollarTree (DLTR) failed to maintain a weight of 0.10% in the Nasdaq 100 Index at for two consecutive month ends and was deleted from the Index. It was replaced by Applovinn (APP), the technology company that provides a platform for application developers.

2024 In Review

For the year, QQQ’s total return of 25.60% outperformed the S&P 500 Index’s total return of 25.00% by 0.60%. The biggest contributors to QQQ return were NVIDIA with an average weight of 7.03% and a 2024 total return of 171.25%, Broadcom with an average weight of 4.81% and a 2024 total return of 110.43% and Meta Platforms with an average weight of 4.71% and a 2024 total return of 66.05%. NVIDIA and Broadcom were the two best performing stocks for the year in QQQ with Constellation Energy being the third best performing, up 92.73% for 2024.

Seven of the 10 ICB sectors that QQQ has exposure to finished in positive territory for the year versus 10 of the 11 ICB sectors finishing 2024 in positive territory for the S&P 500 Index. Much like Q4, Consumer Discretionary was the biggest contributor to relative performance against the S&P 500 Index with an average weight of 18.32% in QQQ (vs. 13.99% for the S&P 500 Index) and a 2024 return of 39.22% (vs. a 31.34% return in the S&P 500 Index). The sector was the best performing in QQQ topping the Utilities sector return of 33.34% and Technology’s 2024 return of 30.67%.

Market Drivers During Q4

Much of the attention for the quarter centered around the Presidential election on November 5th. In the initial weeks following the Trump victory, it appeared the market reaction leaned towards a broadening out equity performance: Value (S&P 500 Value Index) outperformed growth (QQQ); Small caps (S&P Small Cap 600) outperformed Mid-caps (S&P Midcap 400); Mid- caps outperformed large caps (S&P 500 Index). Although when the dust settled for the quarter, QQQ outperformed the S&P 500 (large caps), S&P 500 Value® Index (Large Cap Value) the S&P Midcap 400® Index (midcaps) and S&P Small Cap 600® Index (small caps). Additionally, from the time of the election (11/05/2024) through quarter end, QQQ outperformed the aforementioned indices, and only QQQ and the S&P 500 Index finished in positive territory from 11/05/2024 – 12/31/2024.

Inflation readings showed price acceleration over the course of Q4, and began to raise questions about whether the Federal Reserve may have to reverse course on its rate cutting cycle.  The Consumer Price Index (CPI) reports for September, October and November were released and showed year-over year growth of 2.4%, 2.6% and 2.7%.² Producer Prices also showed an upward trajectory in Q4 with the Producer Price Index (PPI) readings for September, October and November coming in at 2.0%, 2.6% and 3.0%.³ The 3.0% reading was the highest in the gauge since February 2023’s reading of 4.7%. The large acceleration was attributed to food prices, particularly egg prices that saw a 55% jump vs. the prior month. Outbreaks of avian flu have forced farmers to cull flocks and has impacted supply as egg production is down. The aspects of the release that influence the Federal Reserve’s preferred inflation gauge, Personal Consumption Expenditures, were largely favorable from a month-over-month perspective but mixed on a year-over-year basis.⁴ Hospital care, both outpatient and inpatient showed no price change and 0.2% change, respectively on a month-over-month basis but each increased by over 3.2% on an annual basis. Portfolio management prices declined by 0.6% month-over-month but were higher by over 20% on an annual basis. Investors have kept a keen eye on these measures as indicators of future Fed policy.

Over the course of the fourth quarter, the Federal Open Market Committee (FOMC) met twice, in November and December.⁵ During both meetings the Fed cut its target rate by 25 basis points, first to 4.50% - 4.75% in November and then to 4.25% - 4.50% in December. The latter was referred to as a “hawkish cut” as the summary of economic projections that were released raised questions around the fight against inflation. Perhaps the most notable change was the median inflation forecast for 2025 increased to 2.5%, up from 2.1%. As such, the Fed’s dot plot now reflects the median policymaker anticipates two 25 basis point rate cuts for 2025, as opposed to four 2025 rate cuts projected in the September release.⁶ The market reaction to the release was negative, with the yield on the 10-year Treasury jumping by 13 basis points and QQQ shares plummeting by over 3.3% on the day.⁷ In the press conference Fed Chairman Jerome Powell was asked about president-elect Trump’s policies being considered when discussing economic projections; to which he noted that the proposals and policies are being evaluated but are not yet an active part of the projections or decisions as the Committee will have more clarity after they are enacted.

Outlook

As we turn the page to 2025, we identify a number of areas of focus in the equity market that have the potential to drive QQQ performance and broader equity market returns.

From a macro perspective, attention around inflation and interest rates is not going away. Year-over-year Prices accelerated in Q4 as evidenced by the Consumer Price Index, Producer Price Index and Personal Consumption Expenditure Index which has raised questions around the Fed’s rate policy going forward. There is also concern around upward pressure on prices as President Trump takes office. While further detail is needed, large tariffs on Chinese goods, those from our North America neighbors Canada and Mexico and blanket tariffs on virtually everywhere else global would likely bring significant cost impact to any company manufacturing outside of the United States. Tariff impact would likely be felt by consumers as companies pass higher potential input costs or manufacturing costs through. With an acceleration of price increases, the Fed may be forced to keep rates at higher levels. In the most recent December meeting, Fed language around the timing and size of rate cuts suggest fewer cuts in 2025 than previously anticipated. At present according to Fed Funds futures, market participants are anticipating two cuts in 2025, less than previous forecasts for 2025 that we had seen across much of Q4 2024.⁸

Expect continued focus around Artificial Intelligence (AI) as capabilities around AI-powered services and solutions grow at an exponential phase. We expect the AI trend to broaden in 2025, as attention will likely expand beyond the semiconductor space (and compute power) to other segments of the market. Many are forecasting Agentic AI to emerge as a viable solution in 2025. Like its name suggests, Agentic AI is designed to act like an “agent.” With the potential to operate like a human, AI agents could autonomously answer questions, understand language, learn/improve on its own processes and more. Where might we see agentic AI employed and what kind of disruption, cost savings, changes will we see? What companies/industries will be utilizing agents as well as generative AI most effectively? Broadly, where are the benefits to these transformations- time savings, cost savings, positive impact to fundaments? These are questions we expect to linger from 2025 and beyond.

For QQQ and the broader equity market, the earnings picture always remains an important one. In the last weeks of January and first week of February we will hear calendar Q4 results from many of the largest companies in QQQ. Calendar Q4 represents the largest quarter in terms of revenue and earnings per-share for many of these companies. Additionally, company outlooks for 2025 will be watched closely and scrutinized for comments around potential disruption from tariffs, interest rates, etc. At present (January 2025), full-year Nasdaq 100 earnings growth projections stand at nearly 22% growth for 2025, and over 15.5% growth for full-year 2026. We have seen a fundamental growth rebound from FY 2022 and 2023, where Nasdaq 100 earnings grew at mid-single digits and healthy fundamental growth will likely be a positive driver for Nasdaq 100 companies.