As investors by now know, tech was a wreck in 2022. It was one of the worst-performing groups in the S&P 500 and overshot — by a wide margin — the broad market’s dismal annual showing.
The Federal Reserve’s seven interest hikes, which depressed the allure of tech companies’ future cash flows, was a primary reason the sector scuffled in 2022. There’s already been one rate hike this year and speculation is increasing that the Fed will have to continue boosting rates, perhaps in surprisingly aggressive fashion, to damp inflation.
Still, the Invesco QQQ Trust (QQQ) and the Invesco NASDAQ 100 ETF (QQQM) are higher by nearly 10% year-to-date. That could be a sign those exchange traded funds, both of which follow the Nasdaq-100 Index (NDX), are primed to potentially be more durable this year against the backdrop of Fed tightening than they were in 2022.
Bolstering the case for the sector and tech-heavy ETFs such as QQQ and QQQM are multiple catalysts, including robust margins and the burgeoning artificial intelligence investment thesis.
“We expect to see increased M&A activity in the technology sector. Software clearly will consolidate this year, in our view, with much moving into private equity where there is some $1 trillion in cash waiting to be deployed. Software companies broadly derated to 5x revenue last year,” noted BlackRock. “We are already seeing private equity deals priced at 8x multiples. Such healthy premiums are likely to fuel a takeout wave. After a very bad year for software, we expect either public investors will recognize the value or private equity will.”
Regarding artificial intelligence, that secular theme is captivating investors this year and while QQQ and QQQM aren’t dedicated plays, the Invesco ETFs are chock full of stocks with direct and indirect AI ties. Those include Alphabet (NASDAQ: GOOG), Microsoft (NASDAQ: MSFT) and a variety of semiconductor makers.
“The use-cases across businesses are endless, in our estimation, with potential to be extraordinarily disinflationary and change the long-run outlook for human labor. Initial investment opportunities are in the semiconductors that can support the computational needs of this ground-breaking technology. We see generative AI as the most revolutionary tech since the internet, with investment opportunities available now,” added BlackRock.
Another potential catalyst for QQQ and QQQM is the possibility of a fresh round in consolidation in the tech sector. Many member firms of these ETFs have the cash on hand to execute big deals and some could be compelling takeover targets. The software industry could be fertile takeover territory.
“Software companies broadly derated to 5x revenue last year. We are already seeing private equity deals priced at 8x multiples. Such healthy premiums are likely to fuel a takeout wave. After a very bad year for software, we expect either public investors will recognize the value or private equity will,” concludes BlackRock.
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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.
