Tripling your money over the course of a decade sounds ambitious, but it's actually not as tough as it sounds. It requires an average annual return of 11.6%. Given that the S&P 500 has averaged around a 10% total return per year over the past century, it doesn't seem that far-fetched.
Over the past 10 years, the Invesco QQQ Trust (QQQ 0.19%), which tracks the Nasdaq-100 index, has delivered an average annual return of just over 20%. Despite steep drawdowns in both 2020 during the COVID pandemic and again in 2022, QQQ has been one of the best-performing large-cap growth exchange-traded funds (ETFs) in existence and remains in high demand today.
But that's now in the past. Can the Nasdaq-100 triple investors' money again over the next decade? Let's take a look at some of the factors that will determine the answer to that question.
Image source: Getty Images.
The AI revolution
There's a lot that goes into this, so let's break it down one by one. It's safe to say that artificial intelligence (AI) is the biggest technological advance since the internet. As it develops, it's likely to infiltrate almost every aspect of our lives from retail to medicine to education and beyond. And we're still in the early innings.
There's little question that the long-term growth potential of AI and quantum computing is immense. But the stock market isn't the economy. A lot of that potential is already being priced into stocks, which potentially makes future stock returns more limited.
At the center of that is AI spending. Most of the megacap tech companies have committed tens, if not hundreds, of billions of dollars to infrastructure development. While initial returns have been positive, we still don't know what the ultimate return on investment will be for those expenditures. If it turns out to be less than expected, prices for tech stocks (and QQQ by extension) could fall.
NASDAQ: QQQ
Key Data Points
The "Magnificent Seven"
Nvidia, Apple, Microsoft, Amazon, Alphabet, Meta Platforms, and Tesla account for approximately 44% of the Invesco QQQ Trust's portfolio. That means the performance of the ETF will be heavily dependent on the performance of just a handful of tech giants.
As it relates to the AI trade, that's probably a good thing (at least for now). The "Magnificent Seven" stocks have been among the biggest winners of the AI boom so far and are likely to continue being leaders in this space.
There will likely come a time, however, when the list of winners broadens out. That doesn't mean the megacap names won't still be winners, but we may see the biggest future returns coming from elsewhere. Given QQQ's heavy reliance on the biggest companies, future returns could certainly still be solid, but maybe not on par with what we've seen over the past 10 years.
Valuation
There's little question that stocks are pricey right now. The S&P 500 currently trades at about 22 times forward earnings, which is near the highest levels we've ever seen for the index. The magnificent stocks trade at 29 times forward earnings, also a near-record high.
Generally, when you start with a higher valuation, future returns tend to be more modest. Keep in mind though that stock prices are driven by earnings growth. Stock prices can be expensive and rallies can continue for a while so long as companies are growing their earnings to back it up.
Given the potential of the AI revolution, it's not unreasonable to think that the Nasdaq-100 components can maintain above-average valuations for some time. With 10 years to ride out some of the highs and lows, any contraction in price-to-earnings multiples could feel less painful considering the long time horizon.
Can the Nasdaq-100 ETF triple over the next decade?
An 11% to 12% average annual return for the Nasdaq-100 and QQQ isn't a big hurdle to clear. Those returns are pretty common to what we've seen historically. The main questions are: Can these big tech and growth companies continue to generate strong earnings growth for the next several years, and will current high valuations be detrimental to future returns?
I think the answer to the first question is yes and the answer to the second is probably not. Of course, an unforeseen recession at any point over the next decade could render the entire argument moot. But as far as having the appropriate catalysts to make it happen, I think there's no question that the Nasdaq-100 could triple in the next 10 years.
