Over the past several weeks, one of the biggest questions in the U.S. stock market was whether major internet and technology companies were at the end of a major multiyear rally, one that single-handedly lifted the broader market over the course of 2017.
While the stocks — known by the acronym FAANG, which stands for the quintet of Facebook, Apple, Amazon, Netflix, and Google, whose parent company is Alphabet Inc. — have come under heavy volatility in 2018, they have generally performed in line with the overall market, and some of them have continued their spectacular rise.
The strength of the FAANG thesis got major validation Thursday, after Facebook FB, -0.33% reported blowout quarterly results the day before. The stock spiked 9% in response. Further support for FAANG names came after the market closed on Thursday, when Amazon.com Inc. AMZN, +3.60% doubled its earnings and posted revenue growth of 43%, results that were poised to take the stock to new records.
While Facebook remains more than 10% below a record set earlier this year, it has sharply rebounded from recent weakness, when a scandal over how it handled its user data pushed it into bear-market territory, or a decline of at least 20% from a peak.
The controversy led to concerns that users might start to abandon the platform. However, Facebook’s results assuaged these concerns.
“Investors have been concerned that the events over the past month and a half would impair Facebook’s growth and user adoption, but that’s clearly not the case,” said Paul Nolte, portfolio manager at Kingsview Asset Management.
Nolte added that despite concerns about the valuation of the FAANG stocks, something he noted has persisted for years with little impact on the stock prices, the group’s prospects remained strong by many measures.
“Given their growth rates, some of them still look inexpensive relative to the past several years,” he said. “And Apple AAPL, -1.16% , given its price-to-earnings and revenue, you can argue that it’s actually cheaper than something like Procter & Gamble PG, +0.08% .”
Apple is actually the worst performer of the five, down 3% thus far this year, compared with the 0.2% drop of the overall S&P 500. Both Facebook and Alphabet have hewed closer to the overall market than investors may realize: Facebook is down 1.3% year to date, while Alphabet is down 1%.
The other two FAANG names, on the other hand, have been incredible outperformers. Amazon has jumped more than 30% while Netflix NFLX, -0.71% has more than doubled that, gaining 63.5% on the year. Part of Netflix’s rally has been due a massively strong quarter of its own, which was seen as calming concerns that it its valuation wasn’t supported by its growth.
The strength of Amazon and Netflix — both of which are classified as consumer-discretionary names, as opposed to technology — means that despite the high volatility of the FAANG group overall, the quintet has generally been a positive force in the market. While the Dow Jones Industrial Average DJIA, -0.05% and the S&P 500 SPX, +0.11% are in their longest correction since 2008, the Nasdaq Composite Index COMP, +0.02% , which is heavily weighted toward these megacap firms, hasn’t corrected at all. While the index fell 10.3% from its peak on an intraday basis, it never closed 10% below its record, the classic definition of a correction.
Thus far this year, the top-performing S&P 500 sector is discretionary, up 5%, while tech is in second place, up 4.3%. Only four of the 11 primary industry groups are higher on the year.
“Tech has been the leading sector of the market for years, and while it took a backseat over the past few weeks, it is now reasserting its leadership and the market is following,” Nolte said. “While I’m not comfortable with market valuations overall, tech still looks relatively inexpensive.”
