S&P 500 sales growth is rising but tech especially big tech AKA FAANGs still dominates.

Research has shown that over the long-term most of the returns from the S&P 500 have been generated by a small number of companies, and recently the trend has only become more clear as tech giants come to dominate index returns. During the first quarter of 2016, Apple and Facebook accounted for more than 20% of the S&P 500’s gains and 50% of the 4.7% total gain in the year to April 18 came from just ten stocks, including Amazon and Alphabet.

The impact these tech giants are having on the wider index should not be underestimated. Excluding the returns from the so-called FAANG complex, the S&P 500 returns over the past two or three years would be nowhere near as impressive as they are today. In fact, it’s likely the returns would be negative (for 2015 the S&P 500 ended down less than 1% but the FANG stocks produced an average return of 83%).

Get The Full Series in PDF

Get the entire 10-part series on Charlie Munger in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

FAANG Will Grow 16 percent this year  ahead of S&P 500 Sales Growth

Analysts at Goldman Sachs expect the FAAMG (FB, AAPL, AMZN, MSFT, and GOOGL) complex to continue to have a disproportionate impact on S&P 500 returns over the next two years. A recent report from the bank claims that over the next two years this complex will grow sales by 16% per annum with Amazon leading the charge with expected growth of 22%. Although Facebook has the highest expected year/year sales growth rate of the five companies at 39%, it represents only 5% of FAAMG sales and just 0.3% of S&P 500 index-level sales.

Even though Goldman argues that FAAMG sales growth will have little impact on the S&P 500 overall sales growth as the complex only represents 6% of aggregate sales, excluding these tech giants from S&P 500 growth forecasts has a significant impact. Each 100 basis point of FAAMG margin expansion represents $0.70 in incremental S&P 500 earnings per share and every 500 basis point change in sales growth for the group represents about $0.60 in earnings per share according to Goldman’s analysis.

FAANG Will Grow 16% In 2017 Outpacing S&P 500 Sales Growth

However, according to the bank’s forecasts for overall year-on-year sales growth during the next two years, excluding the FAAMG complex gives a 20% reduction in overall growth. Excluding these tech giants, S&P 500 sales growth is expected to be 4% for 2017 and 4% for 2018. Including the FAAMG group, growth is expected to come in at 5% for each year. The impact the tech complex has had on sales for the past two years is even more pronounced. During 2016 and 2015 excluding the FAAMG contribution S&P 500 sales growth was 0% and -6% respectively. Including FAAMG, the figures improved to 2% and -4%. Year-to-date this group of companies has rallied 25%, contributing 28% of the S&P 500’s total year-to-date return of 10%.

Save