History has taught us that efficiency gains do not always translate to durable earnings growth. However, I would caution in considering these cost savings to be a permanent increase to earnings. On the surface, that would seem like a fundamentally rational reason for the index to rise in price. These layoffs and similar cost cutting measures have already significantly improved earnings across much of the index. Simply put, most things in the information services industry can be done faster and cheaper than previously. A population that is much better versed in coding than it used to be.The idea is that with improved technology the companies can fulfill all the same functions with fewer people. So far this is taking the form of mass white collar layoffs. The rest of the outperformance seems to be driven by rather substantial earnings growth driven by efficiency gains. Discount rates tend to be driven by the 10 year treasury yield with some risk premium added on top, so the 10 year yield moving from 4 to 3.50 so far in 2023 is a huge boon to tech and explains at least a portion of QQQ's year to date outperformance.Īs far as I can tell, that portion of the move is correct. Higher rates disproportionately hurt the QQQ because of its longer duration. In academic theory, higher interest rates hurt all equities because it means the discount rate is higher so the present value of everything is less. Thus, the weighted average cashflow is further into the future which means more years of discounting to get to present value. Since this is among the growthier indices with relatively low earnings yield today, it has a higher duration than most other equities. Instead, the main driver here is discount rates. Most of the index runs light on debt, so the QQQ doesn't care that short term interest rates are still very high. The 10-year treasury began the year right around 4% and now sits at about 3.5%. The first reason is legitimate and financially correct. Efficiency improvements are driving earnings.The tech index as measured by Invesco QQQ Trust ETF ( NASDAQ: QQQ) is up 23% year to date, primarily driven by 2 factors:
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