Correlation Between FAAMG stocks And Growth And Momentum Has Been Growing Stronger

Correlation Between FAAMG stocks And Growth And Momentum Has Been Growing Stronger

It seems the FANG acronym (Facebook, Amazon, Netflix, Google/ Alphabet) has been replaced by the FAAMG stocks: Facebook, Amazon, Apple, Microsoft, Google/ Alphabet. However, a few analyst reports on the new acronym have drawn attention to the tremendous tear these names have been on, resulting in a sudden decline. Goldman Sachs analysts refer to the FAAMG stocks as “mega-tech stocks,” and they believe the group is a product of the “death of the reflation narrative.”

FAAMG stocks driven by growth and the death of reflation

In a report dated June 9, Goldman Sachs analyst Robert Boroujerdi and team examined the FAAMG stocks in light of factors, portfolio weightings and risk. They noted that when growth is lacking, as has been the case recently as interest rates have been low for a long time, investors buy growth. As the world’s central banks weighed fiscal stimulus and tried to decide when to start tapering, the FAAMG stocks appeared on the scene, “poised to dominate disruption.”

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Together, these mega-tech stocks have added $600 billion in market capitalization this year so far, the equivalent of Hong Kong’s and South Africa’s GDP combined. Firms are now drawing comparisons between Amazon and other members of this group with the “Nifty Fifty” between 1999 and 2000, and when looking at the stocks on a risk-adjusted basis, their outperformance is even more pronounced.

Interestingly, the Goldman team also point out that often Netflix (a member of the FANG stocks, which were the focus before FAAMG) and NVIDIA are often included in the group of mega-tech stocks that are being discussed right now. However, what keeps them out of the FAAMG acronym is the fact that they’re not yet big enough to have any “significant” impact on the S&P 500. Netflix’s current weighting is only 0.4%, while NVIDIA’s weighting is 0.3%.

Mega-tech stocks drive the momentum factor

The Goldman team noted that the FAAMG stocks have gradually become more and more correlated with the growth and momentum factors. They add that currently, the momentum factor is being driven by the rise of the mega-tech stocks, and the factor has “built a valuation air pocket underneath it creating cause for pause.”

They add that momentum stocks, which includes the FAAMG name and also Netflix and NVIDIA, is becoming more and more crowded. Since their report was published on June 9, these mega-tech stocks and other popular tech names have tumbled, although they have since stabilized and are bouncing back in some cases. The Goldman team pointed out, however, that the momentum factor “will regularly be re-populated with the strongest performers across the market.”

As a result, they point out that momentum stocks are increasingly trading like growth, which has risen 15% year to date. In fact, they found that growth’s correlation with momentum compared to other long and short factors is the highest it has been in the last five years. It sits within the 95th percentile currently.

They also found a strong correlation between tech and momentum and growth, which they interpret as “a reflection of investors seeking out secular opportunities not reliant on Washington DC’s policy agenda.

faamg stocks mega-tech stocks

The Goldman team adds that the correlation between the FAAMG stocks and growth and momentum has been growing stronger in recent months. Further, they said that the stocks in this group

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