If you’re feeling a little confused about what’s happening in the U.S. stock market right now, you’re not alone.
We’re in the middle of the Covid-19 pandemic, unemployment is skyrocketing and yesterday we learned the U.S. gross domestic product (GDP) contracted by 4.8% during the first quarter — the fastest pace since the 2008 financial crisis.
And yet, with all of this happening, the S&P 500 rose more than 2% Wednesday.
So, what’s going on?
If you want to know what is driving the S&P 500 higher, look no farther than the FAANGM stocks. It’s an ugly acronym, but it serves a useful purpose. Let’s take a look.
Traders and analysts, like Cramer, were watching these stocks because they were already starting to have an outsized impact on the S&P 500 seven years ago. That impact has grown since then.
FANG Stocks Leave Their Mark on the Market
To put in perspective just how important the FANG stocks have been to the performance of the S&P 500, take a look at the FANG fundamental performance chart from Yardeni Research (page 1).
In early 2013, the FANG stocks accounted for a little more than 3% of the S&P 500’s market capitalization (blue line). Since that time, the value of these stocks has grown so much in comparison to the other S&P 500 components that they now account for 11.9% of the index’s market capitalization.
This increase in market capitalization has been driven by an incredible increase in earnings (red line on the chart) from these four companies. The FANG stocks went from producing less than 1% of the index’s earnings in early 2013 to producing an amazing 4.2% of the S&P 500’s earnings today.
What is even more astounding is that these companies have boosted earnings per share so dramatically without experiencing the same magnitude of revenue (green line) growth. The FANG stocks’ revenue contribution to the S&P 500 has only risen from approximately 0.1% in early 2013 to 0.4% today.
When you put it all together, that chart tells a story of market dominance by the FANG stocks. No wonder these stocks have been the darlings of Wall Street for years. The more these companies keep earning, the more investor money flows to them.
FANG Becomes FAANGM
Of course, while limiting the number of stocks in this group made for a cleaner acronym — FANG — it didn’t include all the stocks that were truly dominating the S&P 500. After all, two of the companies that have crossed the $1 trillion market-cap threshold weren’t a part of the list.
To fix that, traders later added Apple (NASDAQ:AAPL) to the list and expanded the acronym to FAANG. Then they added Microsoft (NASDAQ:MSFT) to the list and expanded the acronym to where we have it today: FAANGM.
The addition of these two trillion-dollar stocks made FAANGM’s dominance over the S&P 500 even more clear.
In the market-cap chart from the Yardeni report (page 10), you can see how expanding the acronym from FANG to FAANGM boosts the grouping’s share of S&P 500 market cap from 11.9% to a whopping 22.8% as of April 24, 2020.
In other words, because the S&P 500 is a market-cap weighted index, the performance of these six stocks drives nearly one-quarter of the movement in the index.
If the FAANGM stocks move higher, the S&P 500 is most likely moving higher. If the FAANGM stocks move lower, the S&P 500 is most likely moving lower.
These stocks have been moving higher during the past month, and we’re likely to get much more movement from these stocks this week as the companies release their first-quarter earnings numbers.
NFLX already announced its first-quarter earnings on April 21, after market close. The company added more than 15 million new subscribers as more and more people started sheltering in place. The stock soared higher in the run-up to the company’s announcement, but now it seems to be experiencing some profit-taking.
Fig. 1 — Daily Chart of Netflix (NFLX)
GOOGL stock released its earnings numbers on Tuesday, April 28, after market close, and it surprised Wall Street with better-than-expected revenue numbers. The stock jumped higher at the opening bell yesterday.
Fig. 2 — Daily Chart of Alphabet (GOOGL)
FB stock released its quarterly numbers yesterday, April 29, after market close. The stock has been rebounding since mid-March and initially surged on their results, though they fell on Thursday along with the broader market.
Fig. 3 — Daily Chart of Facebook (FB)
MSFT stock also reported earnings yesterday, April 29, after market close. The stock has almost climbed back up to its previous 52-week highs and bucked the general market trend to move into the green for most of Thursday.
Fig. 6 — Daily Chart of Microsoft (MSFT)
AMZN stock is scheduled to release its earnings numbers Thursday, April 30, after market close. The stock is currently consolidating in the run-up to the announcement (see Fig. 7).
Fig. 7 — Daily Chart of Amazon (AMZN)
AAPL stock will be joining AMZN, announcing its quarterly results on Thursday, April 30, after market close. Apple still has plenty of room to move higher before reaching its previous 52-week high (see Fig. 8).
Fig. 8 — Daily Chart of Apple (AAPL)
The Bottom Line
By the end of this week, the six stocks that makeup nearly one-quarter of the S&P 500’s market cap will have reported earnings. Wall Street’s reaction to these earnings announcements will likely set the tone for the rest of the quarter.
If the other four FAANGM companies can match NFLX’s and GOOGL’s solid numbers, the S&P 500 may climb even higher.
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