The S&P 500 has the worst year since 1939, falling over 16% year to date. Even more impressive is the negative performance of the tech-heavy Nasdaq, that is now down more than 25% year to date. It is Interesting to underline that FAANG got hit the hardest. This acronym is used to indicate the 5 most important IT-companies: Meta, Netflix, Apple, Amazon and Alphabet. It is possibile also to include in this list Microsoft, due to its incredible performance in the last decades. These stocks now represent about 20% of the S&P index. This fact shouldn’t scare us given the extraordinary performance we have become accustomed to.
However, in the last period the FAANG have lost around 1400 billion in capitalization. Meta, Netflix and Amazon recently fell short of earnings expectations, causing the stock to plummet on the market aggravating the already complicated situation. On average, FAANG shares are down approximately 37% since the start of the year. It is also important to keep in mind that tech companies have been hit by several macroeconomic calamities like the Ukrainian War, Covid-19, China and supply chain crisis, high inflation, and many others. Many stocks have been hit, but tech companies seem hammered harder. Investors now want to move their money to safe assets such as gold, overselling high risk assets. We can also think that tech sector had a strong repricing due to rates rise, since analyst had to use higher rates to discount future cashflows in their models, causing the present value of a company’s future earnings to go down. For this reason, tech companies, which tend to have higher valuations due to their growth potential, are now in trouble. However, the extraordinary contribution that these companies have made to the economic growth over the past years should not be forgotten. Just remind that the 2020 rebound of American markets was driven by big tech, with an average return of 42%. What would have been the performance of US equities excluding FAANG?
Bessembinder argues that in the period from 1926 to 2016, only 1092 companies out of 25300 were responsible for the value created in the market, while the remainder (about 96%) didn’t add any value compared to the risk-free investment. More impressive is the fact that out of the 35000 billion dollar created in this period, in excess of the risk-free, 5 companies generated 10% of it and about 90 companies another 50%.
Do you think that the FAANG era is over or that they are destined to shine again? Will their performance be replaced over time by a group of other companies?
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