There is no hiding the simple truth. Gains in the stock market in 2018 have been top-heavy with S&P stocks having a solid showing.
That is, the stock market in 2018 has been divided into two groups. The winners and the losers. The winners group is quite small, and comprises a few really big winners. Meanwhile, the losers group is quite large, and comprises a bunch of stocks that are struggling.
Goldman Sachs recently released a research note which added numbers to quantify this thesis. The takeaway? The stock market has been more top-heavy in 2018 than you may think.
The top 10 S&P 500 stocks have contributed more than 100% of the index’s year-to-date gain. Meanwhile, the top 5 stocks have contributed over 90% of the S&P 500’s year-to-date gain.
With that in mind, here are the names of those top five stocks that driving the S&P 500 in 2018, and an outlook on where they are going next.
Top 5 S&P Stocks in 2018: Amazon.com, Inc.
YTD Contribution: 36%
How It Got Here: E-retail and cloud behemoth Amazon.com, Inc. (NASDAQ:AMZN) has remained on fire in 2018. The company’s digital retail business remains red-hot. The smart home business is starting to come into its own.
Whole Foods synergies are starting to become more apparent. Amazon Web Services remains the most dominant service in one of the biggest growth markets in the world.
Overall, the company simply continues to march towards world domination, and AMZN stock continues to trend higher as a result.
Where Its Going Next: The wild thing about Amazon is that the company may only be getting started. The e-retail business is strong, but it will inevitably slow over time as e-commerce competition from Walmart Inc (NYSE:WMT) and others picks up. Also, the cloud business is strong, but it too will slow over time thanks to competition.
This slowing, though, isn’t a problem because there are so many more growth levers on the horizon. Amazon is on the verge of creating an industry-changing online pharmacy business. The company is also making huge moves into cosmetics, and I think its likely they make a play for a cosmetics retailer soon.
Of course, there is also the whole logistics business, which presents a billion dollar opportunity, as well as the AI opportunity, which is another billion dollar opportunity.
All together, this is a big growth company with big growth catalysts on the horizon. That combination should continue to power AMZN stock higher.
Top 5 S&P Stocks in 2018: Microsoft
YTD Contribution: 18%
How It Got Here: The turnaround story in Microsoft (NASDAQ:MSFT) has been very impressive. Ever since forward-thinking CEO Satya Nadella took over in 2014, the company has transformed into a cloud powerhouse and the stock hasn’t looked back.
This run continues today, mostly in the form of Microsoft’s hyper-growth cloud services business, Azure, gaining share on Amazon Web Services. The more this business has displayed hyper-growth potential, the more investors have bought up MSFT stock.
Where Its Going Next: The company is doing all it can to position itself for a cloud-dominated future. And they are doing a great job at doing that. Revenue growth trends and the margin profile are both improving.
But this is still a company with a bunch of slow-growth components. That is why despite 90% Azure growth last quarter, overall revenue growth was just 16%.
The problem with MSFT stock is that at 25-times forward earnings, it is trading at a pretty big multiple for sub-20% revenue growth.
Thus, while MSFT stock has the growth prospects to grow into its valuation, the stock may undergo some turbulence in the meantime.
Top 5 S&P Stocks in 2018: Apple
YTD Contribution: 15%
How It Got Here: Despite the iPhone 8 and X both being largely flops due to price-points, smartphone market saturation, and lack of mass appeal next-gen innovation, Apple (NASDAQ:AAPL) has managed to be a big winner year-to-date thanks to the company’s pivot into software.
The growth story at Apple is no longer about selling more iPhones, iPads, and Macs. It is all about getting all of its iPhone, iPad, and Mac users to subscriber to software services like App Store, Apple Music, iCloud, so on and so forth. This growth narrative has been quite good. Services revenue jumped by more than 30% last quarter. As such, Apple stock continues to head higher.
Where Its Going Next: The transition from hardware to software is a critical one for multiple reasons. Firstly, hardware revenues are lumpy. Software revenues are mostly subscriptions.
So you get more predictability in the top line. Secondly, software revenues are higher margin. Thirdly, the hardware business is all dried up and maxed out, and the software business is still nascent and hyper-growth.
Thus, as this transition plays out over the next several quarters, Apple’s numbers should be quite good. Those good numbers will report against the backdrop of a stock that is still remarkably cheap (16.5-times forward earnings). This combination of solid growth and a cheap valuation will power AAPL stock higher.
Top 5 S&P Stocks in 2018: Netflix
YTD Contribution: 15%
How It Got Here: Streaming giant Netflix (NASDAQ:NFLX) got here by wholly disrupting the entertainment distribution model, making it better, and differentiating itself through quality original content. Ever since the summer of 2016 when Stranger Things debuted, Netflix has consistently smashed subscriber growth estimates, and the stock has rocketed higher.
Where Its Going Next: The valuation yellow card is being waved around right now. Netflix stock does look incredibly expensive above $400, and any operational hiccup will result in a sizable sell-off. It doesn’t look like such a hiccup will happen now, but it could happen over the next several quarters as Walt Disney Co (NYSE:DIS) enters the streaming game.
Without that operational hiccup, though, Netflix stock won’t drop in any big way. The investor base has proven to be surprisingly resilient, even at these all-time high levels and against the backdrop of multiple macroeconomic risks. At the end of the day, hardly anyone is selling because the long-term growth narrative is just that powerful.
Top 5 S&P Stocks in 2018: Facebook
YTD Contribution: 8%
How It Got Here: Social media behemoth Facebook Inc (NASDAQ:FB) is up 16% year-to-date, but the ride wasn’t all that smooth. The stock rose nearly 10% in January against the backdrop of a red-hot stock market.
Then, macroeconomic concerns hit. Then, the Cambridge Analytica scandal hit. And Facebook stock not only wiped out its 10% January gains, but also was down as much as 15% year-to-date in late March.
Facebook stock has since shrugged off those concerns. The company reported blowout quarterly numbers back in late April, and has since hit major milestones for Instagram, WhatsApp, and Messenger.
Where Its Going Next: Considering the company’s robust growth prospects through owning four social media platforms, all of which have over a billion users and only one of which is “fully” monetized, Facebook stock looks dramatically undervalued at just 26-times forward earnings.
Revenue growth was 50% last quarter. Profit growth was over 60%. A sub-30 forward multiple just doesn’t compute next to those big growth rates, especially considering big growth is here to stay through Instagram monetization, WhatsApp monetization, Messenger monetization, Marketplace, Workplace, Groups, and IGTV.
As of this writing, Luke Lango was long AMZN, AAPL, DIS, and FB.