The market’s rebound has been following the surge from a select group of elite tech stocks. Why tech’s dominance won’t be ending anytime soon
Take a guess …
If you combine the market caps of the FAANGM stocks — Facebook, Amazon, Apple, Netflix, Alphabet (formerly “Google”), and Microsoft — what percentage of the entire S&P 500 do they collectively represent?
Factor in how the S&P 500 contains actually 505 companies, some of them huge — for instance, Johnson & Johnson, Berkshire Hathaway, Visa, JPMorgan, and Procter & Gamble, to name a few.
Also factor in how, if the index was equal-weight, these six stocks would collectively represent 1.18% of the S&P’s total market cap.
Ready?
For the answer, let’s turn to John Jagerson and Wade Hansen, editors of Strategic Trader.
In their update to subscribers on Wednesday, they tracked the progression of these tech powerhouses from their original “FANG” definition in 2013 (Facebook, Amazon, Netflix, and Google) to its more-recent, expanded definition we noted above.
From John and Wade:
In the market-cap chart below (Fig. 2), 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.
Fig. 2 — FAANGM Stocks’ Share of S&P 500 Market Cap as of April 24, 2020 — Chart Source: Yardeni Research
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.
The practical effect of having six stocks comprise almost 25% of an index is simple — as these stocks perform, so performs the index (most times).
Now, for any readers out there who have shared my bewilderment at how the S&P surged 30% in recent weeks while the U.S. economy has been hobbled, this FAANGM dominance explains a lot.
Back to John and Wade:
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 today 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% today (written on 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 …
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.
“Moving higher” is understating what the FAANGMs have done recently.
On Wednesday, after reading John and Wade’s update, I looked at how much these stocks have rallied from their March lows. As of then:
Facebook — 31%
Amazon — 40%
Apple — 28%
Netflix — 39%
Alphabet — 27%
Microsoft — 30%
With these six stocks representing almost 25% of the S&P, it’s no wonder the index has been climbing.
***What can we learn about the FAANGMs’ earnings?
As of yesterday, all six FAANGMs have now reported Q1 earnings. And in large part, we’ve seen solid, and in some cases, downright strong numbers. The two companies that didn’t shine as bright were Apple and Amazon.
Amazon’s report was the most disappointing, with earnings-per-share coming in well below analysts’ expectations. But this isn’t anything new. In fact, this is the third quarter out of the last four in which Amazon has come up short on its bottom-line EPS … yet its stock has just hit its all-time-high a few days ago.
Meanwhile, Apple posted flat revenues and didn’t offer any forward-looking guidance.
Going just by the numbers, as a group, the FAANGMs have made it through this Corona-quarter in generally good shape. There’s still Q2-weakness to worry about, but one quarter at a time …
In summing up their Strategic Trader update (prior to all the FAANGMs earnings reports), John and Wade told us that Wall Street’s reaction to the FAANGMs collective earnings reports would likely set the tone for the rest of the quarter.
Up until today, Wall Street has been responding favorably. But in the wake of Amazon and Apple, it’s throwing a little hissy fit.
We’ll be watching for more clues early next week.
***Meanwhile, the overall strength of the FAANGMs and the broad tech sector comes as no surprise to Eric Fry’s subscribers
For any newer Digest readers, Eric is our global macro specialist and the mind behind Fry’s Investment Report. He also happens to be an industry veteran with decades of experience, and more 1,000%+ winning investments than anyone we know of in the business (41 of them, to be exact).
In recent months, Eric has been studying and writing about a phenomenon he’s named the “Technochasm.”
This is his term to describe the widening wealth gap that’s happening in America (and around the world), thanks in large part to huge investment gains coming from select, technology investments.
On one hand, cutting-edge tech products are simplifying our lives, making them far more convenient. This is why Americans are happy to open their wallets for tech — and this means most Americans, even those who aren’t necessarily earning high incomes.
On the other hand, this is a huge wealth transfer — from the masses …
to a select group of technology business owners, key employees, and investors …
And it’s creating a sharp wealth divide — in the socioeconomics of our society, as well as in the stock market.
***Earlier this week, Eric provided his subscribers a visual illustration of how the Technochasm is creating division among stock returns
From Eric:
Below is a three-year chart of software stocks versus the market.
To be precise, the chart shows the iShares North American Tech-Software ETF (IGV) versus the S&P 500 Equal Weight Index (SPXEW).
The S&P Equal Weight Index is pretty much breakeven.
But even after that coronavirus gut punch, IGV is up an incredible 84.6%.
Now, we all vaguely recognize that tech stocks are still doing well, despite the Coronavirus crisis. And we have a vague awareness that tech billionaires haven’t been financially hurt by the crisis.
But you might not have known that these billionaires have actually gotten richer as the pandemic has raged. This is the Technochasm at work.
Back to Eric:
Since the beginning of March, more than 22 million Americans have lost their jobs.
Meanwhile, American billionaires saw their total wealth increase about 10%. They now own $282 billion more than they did two months ago — a combined net worth of $3.23 trillion.
Eric goes on to explain how most investors don’t truly understand what’s happening here. Yet the ramifications of not understanding — and as importantly — not acting on that understanding, could have a profound impact on your financial wellbeing:
Not knowing why technology — and, in particular, software — is outperforming the rest of the market could mean having a far poorer retirement. It could mean many more years of working, instead of ever retiring at all.
***Investors looking to position their portfolios in light of the Technochasm need to make two moves today — one offensive, one defensive
On the offensive side, it’s aligning your wealth with tech strength. This extends well-beyond the obvious FAANGM stocks.
On the defensive side, it’s purging your portfolio of “old school” stocks that, though perhaps once strong, have failed to keep up with technological advancements. The danger is many of these stocks still have well-known brands so many investors aren’t aware of their underlying weakness.
Eric has put together a presentation on the Technochasm for any readers interested in learning more, which you can access free by clicking here.
In the meantime, keep your eyes on the FAANGMs for clues about where the S&P is going.
Have a good evening,
Jeff Remsburg
