A fundamental shift may be underway in the stock market, as the once red-hot FAANG mega-cap tech stocks have lost much of their sizzle, and investors abandon them for other alternatives. Not long ago, these premier growth stocks were market leaders, accounting for an outsized proportion of the gains registered by major market barometers such as the S&P 500 Index (SPX) and the Nasdaq 100 Index (NDX).
More recently, however, several of the FAANGs have sunk in price much faster than those market barometers, with several of them in bear markets of their own, down by 20% or more from their highs, as detailed below. These figures are as of the close on Dec. 13.
Facebook Inc. (FB), down 33.7%
Amazon.com Inc.(AMZN), down 19.1%
Apple Inc. (AAPL), down 26.8%
Netflix Inc. (NFLX), down 34.8%
Alphabet Inc. (GOOGL), the parent of Google, down 16.9%
By comparison, the S&P 500 has fallen by 9.9% and the Nasdaq 100 by 12.1% from their own highs. Partly as a result of plummeting values for the FAANGs, tech-oriented ETFs saw "massive outflows" in November, per Bloomberg.
Significance For Investors
“The positive narrative is now broken. Momentum investors are looking at these stocks in a different way than they used to,” as Mark Stoeckle, chief executive officer of Adams Funds, told Bloomberg. The firm manages two of the country's oldest closed-end equity funds. He added: “We can just find better stocks, both in tech and outside of tech, that offer better growth, or better valuations, or fewer risks. The days where the only way you could outperform was to have a taste of the FAANGs are over.”
A similar opinion was shared with Bloomberg by David Lafferty, chief market strategist at Natixis Advisors, which has over $1 trillion in assets under management. He observed: “The conditions that have allowed these kinds of high-growth stocks to outperform have changed, if not reversed. I just don’t see much upside.”
Lafferty elaborated: "The Fed's tightening is getting to where it is starting to hurt. GDP growth should decelerate in 2019, which will lead to a natural decline in earnings growth. What it means for multiples and investor sentiment is up in the air, but I just don't see much upside."
Bloomberg lists a host of negatives swirling around the FAANGs. Facebook has been issuing negative guidance on its growth prospects throughout 2018. Amazon and Alphabet missed analysts' estimates in their most recent quarterly earnings reports. Facebook and Alphabet have been under bipartisan political fire about concerns over user privacy and the dissemination of misinformation. Apple has been beset by reports of weakening demand for its flagship product, the iPhone, also as detailed in an earlier Investopedia article.
Moreover, analysis by Toronto-based Lynx Equity cited by Bloomberg finds that Apple is undergoing its first reduction of employee headcount in years. According to Lynx, "iPhone woes have begun to affect company finances deep enough to trim non-core projects."
Collectively, the FAANG stocks account for 11.5% of the value of the S&P 500, per SlickCharts.com. Add in Microsoft Corp. (MSFT), currently the largest U.S. public company by market cap and one of the FAAMG group of stocks, and these six tech giants account for 15.3% of the index. Their fortunes thus have a large impact even on investors who do not hold their shares.
Despite recent setbacks and doubts, all these companies have huge competitive advantages that may allow them to continue to thrive for the long term. This has been the view of, among others, New York University marketing professor Scott Galloway, as discussed in a prior Investopedia piece.
On the other hand, as the bull market and the economic expansion age, and as market volatility has picked up, there has been a renewed interest in value stocks over growth stocks in 2018. If this trend continues, once-hot growth stocks such as the FAANGs may continue to decline in popularity.