With four months of 2024 in the books, a familiar theme remains in place. Large-cap equities continue beating small-caps. That’s confirmed by the healthy leads over the Russell 2000 Index enjoyed by the Nasdaq-100 Index and the S&P 500.
In fact, the small-cap benchmark is saddled with a modest year-to-date loss. Large-cap gauges are well into the green. That doesn’t mean the case for small-caps is dead. But the large-cap/small-cap chasm underscores the point there’s arguably relative safety available with ETFs like the Invesco QQQ Trust (QQQ) and the Invesco NASDAQ 100 ETF (QQQM).
Those two NDX-tracking funds are large-cap heavy. That’s highlighted by an average market capitalization of $981.77 billion of the stocks held by those ETFs. That’s not large-cap territory, that’s mega-cap land. But it doesn’t imply investors are sacrificing potential growth or multiple expansion by considering these funds.
Lower Risk Growth Available With QQQ
The primary reason many market participants embrace small-cap stocks or ETFs is higher rates of growth, including earnings growth. Indeed, the projected growth rate of the Russell 2000’s EPS for 2024 is well in excess of that of the S&P 500. But the devil’s in the details.
“While a stronger relative growth rate for small caps is a positive, it has to be looked at in a broader context. The estimate for 2024 earnings growth has been cut aggressively since last summer—from 33.4% in July 2023 to 20.7% as of Friday, April 26,” according to a Charles Schwab research. “For the S&P 500, cuts to estimates have been less dramatic, from 11.7% to 9.9% over the same timeframe. It’s normal to see analysts revise their estimates lower throughout the year. However, that tends to end around the middle of the year. So if estimates are still getting slashed in the back half of 2024, it will be more of a warning sign.”
The rate at which analysts are lowering Russell 2000 EPS estimates is faster than what’s taking place with large-caps. And communication services, technology, and consumer discretionary are expected to post the largest EPS gains this year. That’s relevant to investors considering QQQ and QQQM. That’s because those ETFs allocate over 78% of their rosters to those groups.
Harbingers of Positives to Come
Additionally, the earnings potency displayed some of the largest QQQ/QQQM holdings coupled with the limited short-term value offered by valuations could be harbingers of positives to come for these ETFs.
“Given valuation is a horrible short-term market-timing tool, though, we don’t think the current expensive nature of the market means the bull run is at an imminent end. Rather, we think continued strength in earnings growth will help put downward pressure on valuations. But key is whether both the top and bottom lines can hold up,” concluded Schwab.
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