FAAMG Contributes A Third Of S&P 500’s Gains, Some Call Tech Bubble

The FANG stocks have gotten quite a lot of attention, but some firms are trying to shine the spotlight on FAAMG instead. FAAMG consists of Facebook, Apple, Amazon, Microsoft and Google parent Alphabet, the five tech stocks that have dominate the S&P 500’s gains this year. In fact, as of less than a week ago, FAAMG accounted for about one-third of the S&P 500’s gains year to date leading to questions of another tech bubble.

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FAAMG s&p 500's gains tech bubble  S&p 500's gains

Due to the huge gains contributed by the technology sector, some investors are starting to question whether they should be concerned about the potential for a new tech bubble.

S&p 500's gains areĀ  mostly thanks to FAAMG, which is the new FANG

Last week, a few firms started focusing their attentions on FAAMG instead of FANG (Facebook, Amazon, Netflix and Google/ Alphabet). As of June 7, the new acronym accounted for about one-third of the S&P 500's gains so far in 2017, UBS strategist Julian Emanuel and team said in a note dated June 9.

All the analyst writings on FAAMG may be leading some investors to believe that it's unusual for only five stocks to dominate the index's gains, but the UBS team says it's actually not that unusual. They add that since 1993, there have been four other years with positive gains in the S&P 500 that have also been marked by a similar "clustering" of a handful of stocks.

The four years were 1993, 1999, 2005 and 2017, and Emanuel reports that in those four years, Microsoft and Apple each appeared twice. One of the years in which Microsoft was a constituent of the cluster was 1999, and in 2000, the stock plummeted by nearly 63%. The other year was 2007, and in 2008, Microsoft plunged by more than 45%. Apple also appeared in the cluster in 2007, and in 2008, it tumbled approximately 57%.

They describe 1999 as the peak of the tech bubble, adding that it took the Nasdaq 100 more than 16 years to "climb the mountain.

FAAMG tech bubble s&p 500's gains

Just a blip or a sign of a tech bubble?

Looking at the long-term chart, these massive declines look only like "blips," the UBS team explained in their note.

FAAMG, tech bubble, s&p 500's gains

However, given the previous massive gains in Microsoft and Apple followed by massive declines the next year, they noted that some investors are starting to ask whether we've entered another tech bubble similar to the 2000 dotcom bubble. They weighed in on this and also the question of whether the tech rally can continue next year after the massive gains contributed by FAAMG this year.

Still Overweight on Technology

The UBS team said that their firm remains Overweight on the Technology sector and pointed out other instances that suggest Technology can continue to contribute massively to the S&P 500's gains. For example, they note that two of the constituents of FAAMG, Amazon and Google/ Alphabet, have now traded at more than $1,000 per share.

They now trade in the $900s after significant declines in their stock price as some questioned whether Goldman Sachs' report on FAAMG killed the tech rally. Indeed, it wasn't just the FAAMG names that fell; other popular tech stocks fell off UBS' and Goldman's reports as well. However, UBS attempted to do some damage control by emphasizing that it's unlikely that the ultra-low level of volatility affecting the Tech sector will continue in the near term. Emanuel and team said that it's understandable that some investors were "considering buying put protection or using stock replacement (buy call/sell stock)" to protect what they had earned from the S&P 500's gains.

However, they also offered up a list of reasons that the Tech sector is likely to keep outperforming: earnings growth, "reasonable valuations" and overseas cash stockpiles that may become eligible for low-cost repatriation. Further, they explained what might give them cause for concern:

"Absent significant additional multiple expansion or a sharp acceleration of inflows, we'd look for 'seminal events' such as AAPL's attaining a $1TRN market cap or a blockbuster merger announcement similar to 2000's AOL/TWX as guideposts for curbing Technology enthusiasm," they wrote.

They see a $1 trillion market cap as being possible for Apple if the company's more than $200 billion in offshore cash is repatriated, with the key reason being the potential for a major merger of the magnitude of AOL's merger with Time Warner in 2000 when the tech bubble burst.