QQQ - Embedded Expectations Analysis - 2018 03 28
The QQQ currently trades at levels relative to UAFRS-based (Uniform) Earnings not seen since 2003, with a 24.4x Uniform (Fwd V/E'). However, even at these high valuations, market expectations are low relative to recent performance, suggesting reasons to believe companies in the QQQ could exceed market expectationsNasdaq companies have seen Uniform ROA plateau around 36%-40% levels the past five years, as they have focused on accelerating Uniform Asset growth to consistent double-digit levels. As such, market expectations for ROA' to decline from current 36% levels to 34%, with Asset' growth falling to 10%, appears relatively pessimistic. If the companies can just maintain fundamental trends for growth and returns seen over the last several years, there could be potential for equity upside
Valens Market Phase Cycle analysis highlights reasons to think that QQQ companies could sustain fundamentals and exceed market expectations. Corporate management teams are growing more confident about investing in growth, implying Asset' growth may continue closer to recent levels. Also, there are no significant credit headwalls or risks for a credit freeze that could negatively impact corporate profitability, and declining corporate tax rates should boost earnings. Finally, while valuations appear high relative to the past 15 years, there are specific factors, such as currently low inflation and investor tax rates, that warrant higher-than-normal valuations
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