How much bite do Faang stocks have?

How much bite do Faang stocks have?

The dominance of Facebook, Amazon, Apple, Netflix, and Google (FAANG) stocks has arguably been a good thing for both the US and the global market. But, another tech rally would, on face value, give many a shiver.

While Faang’s price-earnings multiples continue to surge forward in the face of obvious concern, there remains the fact that today’s tech bonanza remains wholly different from that of previous rallies, and that is down to cold, hard, earnings.

The Fanng business models are turning a profit, which puts them in direct contrast with the high-octane, low-earnings fuel that powered previous dot com rallies, and left many with more than just their fingers burned.

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The downside this time around is the market has become fixated on these mega-cap, high-growth names being the proverbial ports in a storm, which has spiked their price-earnings multiples into speculative territory. 

The silver lining for anyone concerned about these companies’ long-term survival prospects is that it is clear the innovations being delivered by this group of five will continue to rapidly change the landscape in which we live, work and play, keeping them hyper relevant.

Key points

  • A tech rally could create fears for many investors.
  • When Apple has a bad day it drags the entire US market with it
  • Short-term investor behaviour is not always logical over the long term

Looking at headline risks around the globe it is little surprise investors are looking for safety. 

The current US President has threatened trade wars with China, the EU, Mexico, Canada, and Turkey – and withdrawal from the Korean-American trade deal that was reportedly only averted when his economic adviser “stole aletter off [his] desk”. 

The Italians are dangerously close to re-leveraging up an economy which has already maxed out its credit limits and the political infighting in Westminster is starting to erode what little respect we still have left on the global stage.

It is true to say the rally in Faang stocks has, so far, given global markets that much-needed boost at a time when political volatility could easily have caused markets to trade flat – and possibly even become negative – by the end of the year.

Eschewing the old investment adage of “buy low, sell high”, the market has continued to pile capital into these five large capitalised growth stocks. With the S&P 500 being calculated on a market cap basis, the more these companies’ value expands, the larger the proportion of the total market they occupy.

Effect on markets

The consequence? When Apple (the first company to reach $1trn (£0.77trn) in market capitalisation – recently joined by Amazon) has a bad day, its impact on the S&P 500 is such that it drags the entire US market down with it.

The collective market capitalisation of this exclusive club totals more than $3.25trn (£2.5trn): $1.15trn (£0.89trn) more than the entire value of the FTSE 100. To illustrate the impact of these five tech stocks, look at the MSCI World Index – which represents the 23 largest developed equity markets in the world. From January 2018 to July 2018 the index has risen 3.93 per cent.

Strip out the entire US equity portion from the MSCI World index and recalculate total performance, and you get a return figure of just 0.02 per cent.