Why The FAANGs' Hot Streak May End Soon

The FAANG group of mega cap tech stocks have had a phenomenal run over the past five years, leading the market and responsible for a significant portion of the gains in capitalization-weighted market barometers such as the S&P 500 Index (SPX) and the Nasdaq 100 Index (NDX). But the years of outsized growth for these stocks may be over. "We have very small positions in Google and Facebook and many of the FAANGs—because we think there are great opportunities elsewhere, and it's really hard for us to rationalize a stock that's worth $500 billion to a trillion going up another 50 or 100%. I think that would be very improbable," as Walter Price, a senior portfolio manager with Allianz Global Investors, told CNBC.

Recent Market Leaders

The FAANG stocks include Facebook Inc. (FB), Apple Inc. (AAPL), Amazon.com Inc. (AMZN), Netflix Inc. (NFLX) and Google parent Alphabet Inc. (GOOGL). According to SlickCharts.com, these five stocks combine for 38% of the Nasdaq 100's value, and 12% of the S&P 500's value.

Stock 5-Year Cumulative Gain
Facebook 698%
Apple 290%
Amazon 516%
Netflix 1081%
Alphabet 160%
S&P 500 71%

Source: Adjusted close data from Yahoo Finance

Limits to Growth

The bigger a company becomes in terms of revenues, market share or market capitalization, the more difficult it becomes to sustain a high rate of growth in either. For example, regarding Alphabet, Price said: "I also think there are limits to the business—they have 50% of the advertising business already and the advertising business is growing only a few percent a year."

Smart beta guru Rob Arnott echoes Price's comments. His analysis of stock market history indicates that the top 10 stocks at any point in time are highly likely to underperform during the next 10 years. (For more, see also: Why Smart Beta Stocks Can Crush the Market.)

Indeed, among the hot technology stocks and market leaders of long ago were companies such as General Electric Co. (GE), AT&T Inc. (T) and International Business Machines Corp. (IBM). All three peaked in size and influence years ago. Both GE and IBM are troubled giants that have been struggling to remain relevant, while AT&T has gone from the premier telecom provider in the U.S. to just one among many competitors.

Apple, the largest company by market cap at about $970 billion, is showing its own slowdown in stock price growth. It rose by more than four times the S&P 500's overall average during the last five years, but less than two times the S&P over the most recent year.

AAPL Chart

AAPL data by YCharts

New Tech Bubble

Jim Paulsen, chief investment officer (CIO) of The Leuthold Group, is among those who seen echoes of the late 1990s dotcom bubble in today's group of big technology stocks, per another CNBC report. In a note to clients as quoted to CNBC, he observed, "for five years, tech has dominated the S&P marketplace which is surprisingly close to how long tech dominated during the dotcom run in the 1990s." In remarks on CNBC, he called this a "significant narrowing of participation in the S&P 500" and added, "I just wonder if it might end similarly." (For more, see also: FAANG Stocks Get Their Bite Back.)

In the same CNBC report, Larry Haverty of LIH Investment Advisors raises similar concerns. "Eventually the law of large numbers is going to get [the FANG stocks]," he said. Increased regulation is likely to impinge on the future growth of the big tech companies, in his opinion, including possible antitrust action against Amazon.

Falling Tech Valuations

High valuations have been an ongoing concern regarding tech stocks, but now there is evidence that valuations are eroding, Barron's reports. Is this a good thing, indicating that reality finally is catching up to expectations? After all, as Barron's writes, soaring earnings have caused many tech stocks to surge in price, despite unchanged or even lower valuation multiples. Or are lower valuations a bad thing, pointing to fading confidence in the sector, stemming from worries about limits to growth or looming regulation? The story can be spun either way.

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