Friday HighlightMay 19 2023

Fangs bite back but will they lose their edge?

Search supported by
Fangs bite back but will they lose their edge?
There is scope for growth stocks to be chased even higher as we continue through 2023. (Jason Alden/Bloomberg)

Unlike humans, almost all snakes with fangs can regrow these when they get damaged or knocked out. In 2023, this innocuous example of reptilian Darwinism is apparently now shared with the S&P 500.

After a shocking 2022 for growth stocks, the first quarter of this year will go down as one of the most potent rallies in the history of growth investing, particularly for the small clutch of mega-cap stocks known as Fangs.

Much like snakes, the S&P 500 has managed to regrow these potent growth stocks back into the spotlight this year.

But how has this happened?

Let us take a look at the numbers. By subtracting the performance of tech stocks from the S&P 500’s overall performance, we can see the index is up 3.5 per cent in Q1 2023 – not bad all things considered. 

As we prepare for a potential recession, the market’s takeaway from this rally is 'big is best'.

However, if you were to carve out Fang stocks alone – Facebook (now Meta), Amazon, Netflix and Google (now Alphabet) – you will find they are up 35 per cent, producing times 10 returns on the index in just three months.

This is more akin to a casino than a stock market.

The impact for those who manage diversified portfolios has been that, even if you had allocated a reasonable amount to US equities in 2023, you would still have underperformed if you were not overweight to these specific stocks.

Therefore, as we prepare for a potential recession, the market’s takeaway from this rally is 'big is best', or so that is the story doing the rounds. 

Fanning the flames

The recent banking panic in the US and Europe has done little to halt the rally – if anything, it only added fuel to the flames.

The resulting market narrative was that, in order to prevent a total disaster hitting from the US financial system, central banks were likely to cut rates before the end of the year. As one might expect, this triggered the massive buying of growth stocks. 

In my opinion, if the banking crisis was caused by high interest rates, then they would be cut.

Tremors in the US financial system do not spell out the foundations for a strong market rally.

However, if these failures were due to poor investment decisions by the directors of these banks, it is likely that central bankers remain unfazed – not wanting to address a banking issue that does not affect the wider economy.