When looking back at the artificial, central-bank created "bull market" which started in March 2009 just as the Fed announced its expanded QE1 and continued as central banks purchased over $15 trillion in assets, one remarkable stat stands out: of the 401% total return in the S&P500 from the "Haines Bottom", just 10 stocks have account for almost 25% of the return. Narrowing down the scope, of these 10 companies, 2 FAANG names - Apple and Amazon - were responsible for the bulk of the gains, accounting for roughly 30% of the group's advance.
That's hardly a surprise: in fact, readers will recall that at the end of June 30, just 4 stocks - Amazon, Microsoft, Apple and Netflix - accounted for 84$ of the S&P's upside through July.
And while today's latest rotation into tech has helped send the Nasdaq surging 1.7% as hedge funds once again scramble for a barbell trade, buying both bond safe havens and growth stocks, at least one commentator thinks that the time of the FAANGs is over. In a note published overnight by Bloomberg commentator Ye Xie, he writes that tech companies, epitomized by the FAANGs, have defined the bull market over the past decade. However, he cautions that the FAANGs best days may be behind us, "as their ability to squeeze profitability reaches a limit."
He explains why below:
Time to Bid Adieu to the Golden Era of FAANG Stocks
Since the bull market started a decade ago, the information- technology sector has risen 512%, compared with 305% for the S&P 500. Only the consumer discretionary sector, of which Amazon accounts for 30%, performed better, with a gain of 578%. In FAANG stocks, Facebook, Netflix and Alphabet were moved to the communications sector in the S&P and MSCI industry classifications last year. Apple remains in tech, and FAANG stocks are still largely referred to as tech companies.
What’s more striking is the increase in their profit margins over the past two decades. Since 1990, the tech sector’s trailing EBITDA margin expanded to 31% from 17%. That increase is well above any other sector’s.
Profitability tends to be mean-reverting. Higher margins get eroded over time as newcomers, attracted to lucrative businesses, intensify competition.
So why has that not happened with tech? One explanation is that the sector is dominated by a handful of giants, allowing them to maintain pricing power. While such concentration also seems to be happening in many other industries, arguably it’s more prominent among FAANGs. Consider that Google and Facebook control a combined 58% of market share in U.S. digital ad revenue. It’s increasingly becoming a winner-takes-all market.
Yet that runaway margin expansion seems to be unsustainable. These companies’ dominance in society has increasingly attracted criticism. The tech giants can be blamed for almost everything that goes wrong, from sluggish wage growth and low interest rates to yawning income inequality and lofty stock valuations, according to Joachim Fels, a global economic adviser at Pimco. For instance, tech companies may have contributed to income inequality as employees at these superstar firms are typically highly skilled, making more money than average.
The political backlash against the near-monopoly these companies enjoy seems be reaching a fever pitch. On Friday, Senator Elizabeth Warren, the Massachusetts Democrat who is running for president, unveiled a regulatory plan aimed at breaking up Amazon, Google and Facebook, accusing them of bulldozing competition, using private information for profit, and tilting the playing field against everyone else.
Whether she succeeds remains to be seen, but the risk that tightening regulation may limit room for further margin expansion is real. The FAANG stocks have been the unquestioned leader in this stock market rally. Chances are that the baton has to be passed on to someone else.