- Tech giants over represent broader stock indices and skew the gains.
- The S&P 500 inex is dow just 6% since the start of 2020.
- The FAANG group of tech leaders represent 20% of the index.
Some of the world’s largest tech giants are benefiting from the new reality that consumers are spending more time at home. However, this isn’t reason enough for investors to be buyers of the exclusive tech-heavy FAANG group, according to Scott Clemons of Brown Brother Harriman.
What is FAANG?
FAANG is an acronym that includes five of the largest tech giants, including Facebook, Inc. (NASDAQ: FB), Apple Inc. (NASDAQ: AAPL), Amazon.com, Inc. (NASDAQ: AMZN), Netflix Inc (NASDAQ: NFLX), and Google/ Alphabet Inc (NASDAQ: GOOG).
These five companies are among the best positioned to capture consumer’s attention as people are stuck at home more than usual, Clemons said on CNBC’s “Street Signs Asia.” These companies are also backed by products and services where there is “no question” about their sustainability.
But at the same time, many of these stocks have rallied “too far” and their sheer market cap size and influence certainly “skewed” the broader stock market indices, he said. The five stocks alone account for more than 20% of the value of the S&P 500 index.
As such, the S&P 500 index is now down just 6% since the start of 2020 while some of the FAANG stocks are up by a double-digit.
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Tech stocks and volatility
Tech stocks experienced a notable turnaround after bottoming in March and it will take “something substantial” to retest those lows, Clemons said. But it would be “easy” for the market to catch investors off guard with a 10% to 15% correction. This would be a move that is consistent with a typical upward trending market.
Important to keep in mind, we are “still living in a market of heightened volatility,” he said. Coupled with the reality that the market is very much being driven by tech heavyweights, the market in its current state is still “fragile” and susceptible to new events.
U.S. – China relationship
One of the broader macro themes playing out aside from the COVID-19 pandemic is rising tensions with China, according to Clemons. Most notably, prior trade-related issues remain an area of concern but U.S. President Donald Trump’s unspecified threats against China for imposing new security measures on Hong Kong.
The market may not be fully anticipating a new cold war with China, or market participants understand this reality but aren’t pricing it into stocks at current levels.
“That to me is a risk over the summer that could cause the market to tumble,” he said.