QQQ: Recent Rallies Remain Unsupported By Macro-Fundamentals

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Golden bull and carnivore connected banal information floor plan background. Investing, banal speech financial bearish and mullish marketplace concept.


Investment Thesis

The NASDAQ-100 (NASDAQ:QQQ) has provided investors pinch 30-year mean returns connected finance of astir 20% per annum. Its attraction connected high-growth companies allows nan scale to grounds immense and often continued periods of important economical return growths.

However, a perpetually tightening interest complaint situation mixed pinch a importantly lagging marketplace sentiment intends a marketplace correction is almost imminent for nan index.

The deficiency of fundamental, macroeconomic support for beardown and continued economical maturation further into 2023 places nan existent January-February marketplace rally into nan realms of investor irrationality.

Investors Rally While nan Fed Worries

Equity and securities markets person seen a beardown rally since early January of 2023. Spurred initially by short-term tailwinds, an easing outlook connected ostentation and nan imaginable for complaint cuts successful nan 2nd half of nan twelvemonth led investors to injected immense amounts of money into a assortment of sectors and shares.

Annual Inflation Rate - US Consumer Price Index YoY Change Chart

Yahoo Finance - Brian Sozzi

Unfortunately, this akin bullish sentiment fails to beryllium shared by nan Federal Reserve which continues to hike liking rates and cool nan 6.4% ostentation still facing nan U.S. While nan Fed unwaveringly publishes warnings of continued complaint hikes investors look wholly unresponsive to nan information.

The NASDAQ-100 search scale has seen a 19% rally since nan first of January 2023. Certain individual components of nan scale specified arsenic Microsoft (MSFT) aliases Airbnb (ABNB) person seen explosive maturation of 24% and 60% respectively since nan opening of nan almanac year.

QQQ Time VS Growth % Graph

Seeking Alpha - QQQ Graph

From nan position of nan Federal Reserve, it seems markets are fundamentally unwilling to admit nan effect of rising liking rates.

The wide 3% summation successful unit income successful January mixed pinch a continuing beardown labour marketplace will, I believe, yet time off nan Fed pinch nary prime but to proceed expanding rates further into 2023.

In January alone, nan US system added much than half a cardinal jobs, up 223,000 compared to December 2022.

This creates important uncertainty pinch regards to nan magnitude and anticipation of a recession successful 2023. On February 01, nan Federal Reserve announced another 0.25% complaint summation connected cardinal national funds.

Should specified complaint hikes continue, nan anticipation of a recessionary play becomes moreover much pronounced arsenic nan time-lag betwixt hikes and marketplace sentiment are significant.

The rumor from this deficiency of synchronization of markets to rates comes successful nan shape of a abrupt and fierce marketplace correction which ultimately, look peculiarly apt fixed nan stubborn reluctancy for nan system to respond accordingly.

Disappointing Earnings Season Goes Ignored

When analyzing nan capacity of companies successful FY22, it seems to maine that investors person allowed themselves to beryllium convinced by persuasive property releases and excuses arsenic to why galore family organizations grounded to execute nan results expected.

Many ample organizations specified arsenic Apple (AAPL), Alphabet (GOOG) (GOOGL) and moreover Starbucks (SBUX) person reported net which missed estimates for FY22. Furthermore, a anemic Q4 of FY22 led to a important weakening successful nan marketplace sentiment which was reflected successful astir marketplace scale valuations.

When considering this clear underachievement successful FY22, nan siren bells should intelligibly beryllium ringing successful nan ears of investors pinch regards to nan outlook for FY23.

While nan past tin beryllium a genuinely unreliable parameter of nan future, nan operation of a tightening liking complaint situation and frankincense weakened user spending places nan validity of nan early Q1 FY23 marketplace rally into question.

While immoderate stocks person witnessed important increases successful valuation owed to acute, microeconomic factors (such arsenic Microsoft’s preamble of Chat GPT and nan ensuing AI rally), small actual grounds seems coming to support nan jump successful valuations for market-wide indexes specified arsenic nan NASDAQ-100.

Could It Be The January Effect?

Since 1938, 29 retired of 30 years of market-wide gains person been seen successful January-February. As a wide indicator, nan S&P 500 scale has seen rallies averaging 20% successful these clip periods.

While this arena has been linked to investors trading losers successful their portfolios successful December for tax-harvesting purposes, only to re-open positions successful nan caller year, specified a monumental valuation summation appears irrespectively irregular and irrational.

Burton Malkiel (the ex-director of The Vanguard Group) is celebrated for criticizing nan January Effect, noting that nan seasonal anomalies, while persistent passim history fails to supply investors pinch immoderate genuinely reliable aliases sustainable worth procreation opportunities.

While it would beryllium unfair to blasted nan January effect for nan existent marketplace rally, it could very apt person played a subsidiary domiciled successful boosting valuations successful Q1 of FY23.

The caller twelvemonth is celebrated for giving caller dream to investors, peculiarly aft fiscal years which presented financial difficulties and economical headwinds.

Nonetheless, for existent un-biased study it is perfectly important to stay tethered to nan facts which presently each constituent towards an underperforming marketplace and a consequent overvaluation successful a mostly of companies shares.

I Believe The NASDAQ-100 Is In A Bubble

While galore investigation analysts and method study are pointing to nan NASDAQ approaching a important opportunity to use from a sustained upside breakout, nan large image fundamentals simply neglect to support these claims.

Seeking Alpha QQQ Chart 2000-2023

Seeking Alpha QQQ Advanced Chart

From moreover nan simplest perspective, conscionable analyzing a elemental clip vs percent maturation floor plan for nan QQQ scale illustrates nan clear bubble nan scale is presently facing. The parallels to nan early 2000’s dot-com roar and consequent bust are each to evident moreover to nan untrained eye.

It must besides beryllium noted, that it took conscionable complete a decade for valuations to return and past surpass those levels seen successful nan roar of 2000.

While it would beryllium correct to authorities that nan NASDAQ-100 has already seen a important marketplace correction since nan absurd peaks successful 2021, nan basal truth is that arsenic an scale made up of individual holdings, location is still a important overvaluation present, successful my opinion.


Siblis Research - QQQ CAPE

According to Siblis Research, nan NASDAQ-100 exhibited a highest CAPE (Cyclically adjusted PE ratio: existent EPS averaged complete 10 years) of 59.53 pinch nan ratio connected nan 12/31/2022 being 34.20. The past clip specified immense ratios were seen was during nan dot-com boom.

It is important to statement that nan existent CAPE ratios will beryllium a bully woody higher than those seen astatine nan extremity of 2022 owed to nan aforementioned 19% rally nan scale has knowledgeable since.

To me, this appears arsenic basal impervious that net are being unfairly overvalued by bullish investors. The existent informing signs pointing to a declining marketplace and system whitethorn beryllium going unnoticed. Furthermore, this supports nan presumption that nan scale arsenic a full is facing a important and erroneous overvaluation.

Risks & Summary

When considering nan above, location is small uncertainty successful my mind that nan NASDAQ scale is overvalued. The January-February rally presently being seen seems to wholly spell against nan expectations 1 would person fixed nan continuing inflationary and precocious liking complaint situation nan system finds itself in.

From a deep-value investing perspective, location was immoderate imaginable successful a mates individual exertion stocks astatine nan commencement of nan year. However, nan NASDAQ-100 arsenic an scale and thus, QQQ arsenic an ETF is astir apt astir to scope different highest successful valuations.

While a highest is not needfully a bad point and does usually mean a bully woody of returns for definite fortunate investors, nan deficiency of basal support for these valuations and nan continued overvaluation for nan scale arsenic a full intends further finance into nan money successful a short-medium word is successful my opinion, unsustainable.

Investing into a NASDAQ search money astatine coming could expose investors to important downside imaginable peculiarly successful nan short-term.

On a overmuch longer timeframe, (circa. 30 years), nan risks of individual marketplace booms and busts becomes overmuch little relevant. Dollar-cost-averaging is still nan astir proven method of achieving reasonable prices for securities purchases, particularly erstwhile considered connected specified a immense timeframe.

Unfortunately, I do deliberation a important marketplace correction will return spot for nan NASDAQ-100 successful nan coming months. The expertise for continued economical maturation successful specified a difficult macroeconomic situation is simply unattainable.

This article was written by

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I actively negociate long-horizon finance portfolios. I attraction connected creating portfolio worth done synergetic banal picks, ETFs and bonds to create robust and profitable worth procreation solutions. Deep worth investing and diligent institution study is nan area chromatic of my strategy. Buy nan company, not nan stock.I do not supply aliases people finance proposal connected Seeking Alpha. My articles are sentiment pieces only and are not soliciting immoderate contented aliases security. Opinions expressed successful my articles are purely my own. Please behaviour your ain investigation and study earlier purchasing a information aliases making finance decisions.

Disclosure: I/we person nary stock, action aliases akin derivative position successful immoderate of nan companies mentioned, and nary plans to initiate immoderate specified positions wrong nan adjacent 72 hours. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.

Additional disclosure: I do not supply aliases people finance proposal connected Seeking Alpha. My articles are sentiment pieces only and are not soliciting immoderate contented aliases security. Opinions expressed successful my articles are purely my own.

Please behaviour your ain investigation and study earlier purchasing a information aliases making finance decisions.

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