How 4 Tech Companies Are Dramatically Shaping the S&P 500
Just four mega-cap technology stocks — Facebook, Amazon, Netflix and Alphabet (Google’s parent company) — have been responsible for much of the S&P 500’s upside over the past several years.
The so-called “FANG” group of companies has a combined market cap of around $2.3 trillion. Add in Apple and Microsoft (leading to terms such as “FAANG” or “FAAMNG” for the expanded group) and the total jumps to $4 trillion. Each of these companies is dominant in their field and has dramatically outperformed the market over the past six years.
The S&P 500 has jumped 22% since late December, when concerns over higher interest rates dropped the index to an 18-month low. The rally has been led by tech companies, with the S&P 500 information technology index up 32%. The FANG stocks have led the way, with Netflix up 56% and Facebook climbing 43% since Dec. 24.
It’s startling to see how much these handful of companies are propping up the valuation of the index — and there are signs that the long rally may be coming to an end.
In early June a wave of antitrust-probe news surrounding Facebook and Google prompted a selloff, wiping out about $137 billion from FANG stocks’ market values. The other two FANG behemoths — Netflix and Amazon — also dropped significantly.
There are structural issues at play as well.
“Early-October 2018 saw Facebook, Amazon, Netflix and Google (FANG) break below a short-term uptrend after forming a head and shoulders top,” strategist Stephen Suttmeier wrote in a note to investors, as reported by CNBC. “This was a canary in the coal mine for the late-2018 U.S. equity market correction.”
What is clear is that these four companies have changed the profile, and increased the valuation of the S&P 500 Index as a whole. The forward Price to Earnings ratio (P/E) of the index was 16.1 as of May 30th. However, without the FANG companies, the P/E was 15.0.