One week ago, Goldman triggered a selloff in growth and momentum stocks, when it pointed out that the five largest S&P 500 stocks, the FAAMGS (or MSFT, AAPL, AMZN, GOOGL, FB) have risen to account for 20% of index market cap, representing the highest concentration on record...
... and warning that "narrow market breadth is always resolved the same way" as "narrow rallies lead to large drawdowns as the handful of market leaders ultimately fail to generate enough fundamental earnings strength to justify elevated valuations and investor crowding. In these cases, the market leaders “catch down” to weaker peers."
Fast forward to this weekend when Goldman's David Kostin has published part two of his curious vendetta against the FAAMGs, although this time easing back somewhat, and while again warning that "the relative outperformance of market leaders eventually gives way to underperformance" he concedes that "timing the reconciliation is difficult" especially since "all five stocks reported earnings this week, and the strong results suggest a catch-down is unlikely to be imminent."
Yet while a momentum crash may not be imminent (even if Nomura's quant disagrees), Kostin does not let go, and repeats that the "multi-year outperformance of Facebook, Apple, Amazon, Microsoft, and Google has led to record-high equity market concentration and narrow market breadth" with AMZN (+24%) and MSFT (+12%) have even posted positive absolute YTD returns vs. -9% for S&P 500. Furthermore, demonstrating the record low breadth and surge in dispersion, Goldman points out that although the S&P500 trades just 14% below its all-time high, the median S&P 500 constituent still trades 23% below its record high. As a measure of breadth, this 9 percentage point gap ranks in the 15th percentile since 1980.
Further demonstrating the unprecedented divergence between the top 5 tech names, many of which are not only still employing buybacks and some, such as Apple, further adding to their buyback authorization, Goldman notes that its equity analysts forecast these 5 stocks alone collectively will post 2019-2021 CAGR sales and EPS growth of 14% and 12% vs. 1% and 2% for the other 495 constituents. But the group of five stocks has upside potential of just 3% to GS analyst price targets vs. 10% for the other 495 firms based on consensus estimates.
In short, as we wrote - jokingly - two weeks ago, that "The Market Is Now Just 5 Stocks", that's precisely what has happened, with investors dumping everything but the top 5 names, and creating the biggest "hedge fund/mutual fund/retail/momentum hotel" ever assembled in the FAAMGs. And here another stunning statistic from Goldman: YTD the 5 biggest stocks are up 10% while the remaining 495 S&P500 companies are lower by a collective 13%.
But this is where the good news ends, because in renewing its feud with the "Big 5", Kostin writes that while Goldman expects the FAAMGs to post CAGR sales and EPS growth of 14% and 12%, respectively, vs just 1% and 2% for the remaining 495 S&P companies, trading at a record 28x expected 2021 EPS, the FAAMGs have very limited upside potential of just 3% to the GS analyst price targets. The other 495 firms trade at 16x 2021 EPS and have 10% upside to targets.
In other words, while the priced to absolute perfection - and growth - FAAMGs are expected to deliver strong fundmanetla results...
... since almost every is long them, they are no longer expected to propel the index higher.
If Goldman is right, and the FAAMG's loss of market leadership coupled with Buffett's recent stock sales and warning that markets remain too high (and propped up by the Fed), it is not clear just why anyone would keep buying here, suggesting that the coming week may indeed be painful for the bulls, although they too have a backstop: should stocks suffer another 20% plunge in the next week or so, Powell - whose reputation is now "all in" stocks - will have no choice but to announce that the Fed will start buying equities in his Hail Mary attempt to prevent the final crash.
One final point: this being Goldman, it is virtually guaranteed that the bank is twisting the truth if not outright lying because at the same time as it warns - for the second week in a row - that there is just 3% of upside for the FANGs, the bank recaps its latest analyst actions on the FAAMGs which, it will come as no surprise to anyone, were all raises , to wit:
- AMZN PT from $2,900 to $3,000
- MSFT PT from $162 to $185
- GOOGL PT from $1,250 to $1,425
- FB PT from $170 to $220
- AAPL PT from $236 to $243
So how does one make any sense of i) Goldman warning that the Big 5 are about to cause a sharp market "drawdown" due to their massive concentration while at the same time ii) Goldman analysts hike all the FAAMG price targets? Simple: it's Goldman.