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FAANG Defying Gravity
In our previous post, we have introduced the concept of FAANG (Facebook, Apple, Amazon, Netflix, Google), the five hottest stocks in the S&P 500. How hot? well, in the first half of 2018 (January — June 2018), the S&P 500 grew 2.65%. FAANG stocks alone contributed 3.38% to that growth, while the rest of the companies in the S&P 500 actually declined by 0.73%. See Figure 1 below. This means that the FAANG stocks are solely responsible for the S&P 500 index growth in the first 6 months of 2018. This represents a highly concentrated return in very few companies.
Figure 1: FAANG’s Stock Contribution To S&P500’s First Half 2018 Return
Opinions on the appropriate level of valuation of FAANG stocks are varied. Some analysts argue that the FAANG stocks are overpriced, since stocks with market caps of US$ 500 Billion — US$1 Trillion will highly unlikely be able to increase significantly. Others believe that these high valuations are justified, since these companies have global reach, leaders in their respective markets, have very good margins, and continue to grow at a fast rate.
Nonetheless, the effect of FAANG’s stock price (and Microsoft’s) are driving the returns of the Technology and the Consumer Discretionary sectors of the US economy (Figure 2). The technology sector, where Facebook, Apple, Netflix, Microsoft are categorized in, contributes 2.60% return out of the 2.65% gain achieved by the S&P 500 index in the first 6 months of 2018. This is followed closely by the consumer discretionary sector, where Amazon is categorized in. Meanwhile, other sectors of the economy either grew by less than 1% or declined.
Figure 2: Contribution Of Sectors To S&P 500’s First Half 2018 Return
This is to say that without the FAANG stocks, the overall S&P 500 would have given a negative return in the first half of 2018. The price of these stocks distorts the overall market, and as such, investors must be aware when dissecting the performance of the S&P 500.
Note that past performance is not indicative of future returns. This article is meant to be informative and not to be taken as an investment advice. Our team members at Vested may own investments in some of the aforementioned companies.
Figures above are from: S&P, Bofa Merrill Lynch US Equity & US Quant Strategy.
