FAANG’s 2017 Surge: Can It Last?
FAANG (Facebook, Amazon, Apple, Netflix, Google) stocks are once again posting some of the market’s most toothsome gains in 2017, though significant performance swings can still be expected.
FAANG stocks were the market’s darlings in 2015, when investors rewarded high-growth companies and avoided value stocks. FAANG stocks took a breather in 2016 but are up significantly once again in 2017. All five of these companies have generated strong earnings this year through solid expansion of their businesses.
Facebook has generated continued high earnings per share as its user base has grown and Google (Alphabet) has seen increasing revenue and earnings growth, especially via user growth for YouTube. The overall S&P 500 index, with a healthy YTD gain, has not come close to FAANG’s performance. It is estimated that about one-third of the S&P 500’s YTD return comes from FAANG stocks.
Another tailwind for FAANG is growth stocks’ return to favor in recent months. Value stocks beat growth during the four months after the U.S. Presidential election but starting in March, growth surged once again. With stock market volatility at historic lows, the U.S. economy still in solid shape and unemployment at a 10-year low, investors are looking for growth once again.
The good news for FAANG investors is that these companies seem to be on solid financial ground. Unlike the late 1990s, when the highest stock market fliers were dot-com firms with no earnings, FAANG companies are well-established firms with strong competitive positions and solid profits.
However, expectations for these stocks are high, and these are now pricey stocks in a pricey U.S. stock market. If volatility does pick up, expect a bumpier ride in the future.
Investors have already experienced major downturns for FAANG stocks lately. The first time was in mid-May, when stocks sold off after news that President Trump asked FBI Director James Comey to call off the investigation into the former National Security Adviser. Netflix fell 5.1% that day and Facebook slid 4.9%, while the S&P 500 dropped only 2%. Then a few weeks later, on June 9, FAANG stocks sold off significantly when investor fears about valuations intensified. While the S&P 500 was relatively flat during the period, Netflix fell 5% and Apple declined 3.1%.