(Bloomberg) — For some investors, this year’s rally in tech stocks isn’t just a bear market: It’s the end of an era for some giants like the company. Facebook’s parent is Meta Platforms Inc. and Amazon.com Inc. .
Most read from Bloomberg
Those companies – known together with Apple Inc., Netflix Inc. and Google’s parent company, Alphabet Inc. called FAANG – has led the shift to the digital world and helped drive a 13-year growth momentum.
But history shows that the market leaders of one era almost never dominate the next. There are early signs that a change is underway: The growth rates of Netflix and Meta have slowed or evaporated, while the sheer size of Amazon, Apple, and Alphabet means they’re hard to come by. can bring huge profits in the future as they did in the previous period. past.
“We think FAANG is unlikely to lead the next tech bull cycle,” said Richard Clode, portfolio manager at Janus Henderson Investors. “We are at our lowest level of exposure to FAANG since this acronym was created.”
If it really was the end of the cycle for these companies, how did it end?
The outbreak of the coronavirus pandemic at the start of 2020 rocked the entire stock market, but after a flash plunge and you missed it, the indexes are back on a massive comeback. . Large-cap tech stocks include FAANG leading the way as consumers in lockdown order from Amazon, subscribe to Netflix to watch “Tiger King” and spend hours surfing Facebook and searching Google with iPhones.
But investors are re-evaluating their long-term potential as societies have reopened and higher interest rates around the world have dampened risk appetite.
One of the biggest draws for investors is the super high growth rates tech companies offer. Now the growth looks more pedestrian.
Goldman Sachs strategists wrote in November that “outperform” revenue growth, a trait associated with large-cap technology stocks, has disappeared, at least this year. Bank strategists predict sales growth for large-cap technology stocks of 8% in 2022, less than the 13% growth expected for the S&P 500 Index. Wider.
While Goldman expects tech companies to deliver faster-than-normal sales growth next year and into 2024, the gap is much smaller than the average for the last decade, the company said. ty said.
“It is very difficult to grow that massive revenue at a very, very high growth rate the way they used to be,” said Michael Nell, senior investment analyst and portfolio manager at UBS Asset Management. made in history. “While large-cap stocks have held up well, going forward, it’s hard to see that they will necessarily drive performance from here.”
Meta stock shed a quarter of its value in a single day in October after the Facebook owner’s fourth-quarter sales forecast fell short of analysts’ expectations amid the market climate. advertising field slows down. Amazon.com fell 7% a day later after forecasting the slowest holiday quarter growth in the company’s history.
The example of the stock market stars of the past is very serious. Cisco Systems Inc. and Intel Corp., the leaders of the dot-com boom of the late 1990s, have never climbed back to the highs they reached in 2000, while the Nasdaq 100 Index lost 15. years to surpass the peak in 2000.
Apple, the world’s largest company with a market value of $2.3 trillion, held on to its best during this year’s bear market, down 20%. The stock has been supported by the company’s roughly $170 billion in cash, marketable securities, and demand for the company’s latest iPhones.
Other FAANG stocks fell even further, from Alphabet’s 36% drop to Meta’s 66% drop. Even with the decline, this group still accounts for more than 10% of the weight of the S&P 500, so below-average performance in the coming years will be a major drag on the market.
And the pain for tech stocks looks set to continue next year. Analysts see industry profits falling 1.8 percent next year, compared with expected growth of 2.7 percent for the U.S. market overall, according to data compiled by Bloomberg Intelligence. .
Faced with higher borrowing costs and rising inflation, investors are becoming more demanding about which companies they are willing to support. Large capital projects on unproven technologies, such as Meta’s bet on the metaverse, have not been successful. The basket of losing tech stocks compiled by Goldman has fallen nearly 60% this year.
“The market tells them we want some short-term gains and we can’t afford to fund all of your negative free cash flow. Let’s be a little more realistic: grow a little slower, but do it profitably,” said Neil Robson, head of global equities at Columbia Threadneedle Investments.
Robson still places a heavy emphasis on technology in his portfolio, albeit in a smaller amount than in the past. He still owns Amazon and Alphabet, though he is also investing in companies that improve energy efficiency. Nell of UBS Asset Management is looking for opportunities in the software-as-a-services and semiconductor stocks, while Janus Henderson’s Clode is looking into energy, cybersecurity and artificial intelligence, as well as areas Sectors that can demonstrate resilience in a recession, such as software companies, can help boost productivity.
“Two years ago we could throw darts at the FAANG dart board and we would almost certainly win, right?” Dan Morgan, a senior portfolio manager at Synovus Trust Co. said. “Do we blindly throw money at an ETF that buys nothing but FAANG? That probably won’t work anymore.”
–With assistance from Jeran Wittenstein, Subrat Patnaik, Ryan Vstelica, Michael Msika, Jan-Patrick Barnert and Geoffrey Morgan.
Most read from Bloomberg Businessweek
© 2022 Bloomberg LP
