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Market Insights: U.S. stock market pushed higher by FAANG stocks

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U.S. stock market pushed higher by FAANG stocks

Many of our clients have probably heard us refer to a predominant group of companies known as the "FAANG" stocks. There are some other acronyms out there that may include another stock or two to the group, but this one consists of Facebook, Amazon, Apple, Netflix and Alphabet (formerly known as Google). There is good reason for this. The five companies now make up over 12% of the S&P 500 Index which is an increase from 7.5% just three years ago. It is worth noting that despite its growing market share from extremely strong performance, Netflix is by far the smallest weighting of the five. On the other end of the spectrum is Apple, the world's largest company by market capitalization, with about a 4% weighting now in the S&P 500. 

What we wanted to drive home with this post is that a large percentage of the S&P 500 price return over the last three years is attributable to the FAANG stocks. This makes it difficult for U.S. equity money managers or any equity money manager with global exposure to outperform the index without having an overweight exposure to these companies. The following chart from Bespoke Investment Group highlights this very well:

                                       Source:  Bespoke Investment Group

As you can see, almost 30% of the S&P 500 cumulative price return over the last three years has come from these five companies, with Apple and Amazon being the largest contributors. That is a substantial amount given that the weighting of those five stocks has only been in the 7.5% to 12% range over that period. The reason why many portfolio managers may not have the significant weighting in their portfolios that these stocks represent is partially due to the price at which these stocks are trading. With Apple being the exception, many would consider some of these stocks 'expensive'. For example, Amazon is currently trading at a forward price-to-earnings (PE) multiple of 260 which is roughly 13 times higher than the S&P 500's PE multiple of around 20. Netflix also has an extremely high PE multiple of over 150. Alphabet and Facebook are a bit more reasonable in the 30 range. Another one of the S&P500's largest companies which we have not mentioned, Microsoft (third largest behind Apple), has had very strong performance and its forward PE is also well above the index. If we included Microsoft in "FAANG", it would make the above chart look even more pronounced. The exception, as I noted, is Apple, whose forward PE multiple is only about 15. Many money managers have a strict security selection process for their portfolios, and quite often there is some component of value to that process. That being said, with the rapid earnings growth of these tech behemoths, perhaps their prices are justifiable. Time will tell.