MS: FAANG Hot Streak Coming To An End

Facebook, Apple, Amazon, Netflix, and Google (Alphabet) have been the market’s top stocks in 2017, but what does next year hold for these tech behemoths collectively known as the FAANGs?

According to a recent research note from analysts at Morgan Stanley, collectively the FAANGs have added 4.3 percentage points of market capitalization to the S&P 500 this year, around 24% of the aggregate market cap added since the beginning of the year.

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In total, the top five performers of the S&P 500 this year drove 27.5% of the index's incremental market cap. This is the third highest level of concentration during bull markets of the past 20 years.

FAANG Stocks: Mixed returns

Interestingly, the catalysts for the FAANG rally year-to-date have been mixed. Morgan's analysis shows that Netflix's has actually seen multiple compression as despite being up over 50%, positive earnings revisions have more than offset contraction. Meanwhile, Amazon and Google's gains have seen their price appreciation fulled entirely be multiple expansion. Google's higher customer acquisition costs have offset revenue growth. Facebook and Apple's gains have been most like the S&P 500 with returns coming from both earnings growth, multiple expansion and dividend income.

"FB and AAPL have arguably been most like the S&P with a fairly balanced contribution to price appreciation from multiple and earnings. In contrast, AMZN and GOOGL have seen their price appreciation fueled entirely by multiple expansion. What is perhaps most surprising is that the price appreciation seen to date in NFLX is completely due to strong growth in NTM earnings which has driven price appreciation in spite of some multiple contractions."

FAANG Stocks

But after a strong 2017, it looks as if 2018 could be more of a mixed year for the FAANG group. Morgan's analysis shows that generally, stocks that outperform one year, do not go on to exceed the market in the following year:

"Our analysis shows a wide range of potential outcomes, but on average, top performers, as measured by contribution to overall market cap growth, do not outperform the following year.Leaders in 1999,2000,2001,and 2007 were particularly pressured indicating trouble sustaining momentum within the group during large market swings.2016's leaders have a mixed relative performance vs the market this year - three have total relative returns < -11% and none have returns > 10%."

FAANG Stocks