The economy is in shambles but FAANG stocks are on fire and nearing record highs

Facebook (FB), Netflix and Amazon (AMZN) have all hit record highs in latest days. Apple and Google proprietor Alphabet (GOOGL) aren’t far behind.
The NYSE FANG+ index, additionally dwelling to the likes of Tesla (TSLA), Twitter, Nvidia (NVDA) and Alibaba, is blowing away the remainder of the inventory market and flirting with record highs of its personal. The FANG+ index has surged 24% this 12 months, in contrast with the 7% decline going through the S&P 500. Small-cap stocks, measured by the Russell 2000, have tumbled 15%.
The rush to purchase FAANG, the dominant pressure of the final bull market, does not simply mirror confidence that they’ve the sources to trip out the storm. It’s a broader wager that the pandemic has solely elevated society’s reliance on know-how.

“Tech companies are thriving,” mentioned Seema Shah, chief strategist at Principal Global Investors. “No physical contact and lockdowns mean that this is a crisis that almost works in technology’s favor.”

Coronavirus-proof?

Amazon, maybe the last word coronavirus-proof firm, is Exhibit A. Stay-at-home orders have solely accelerated the shift away from malls and procuring facilities. Online procuring has been a uncommon brilliant spot in a largely dreadful retail gross sales setting.
And with hundreds of thousands of staff working at dwelling, companies are relying on the cloud-computing platforms powered by Amazon and different tech corporations together with Microsoft (MSFT), which is additionally getting near a record excessive.
Likewise, Netflix (NFLX) skilled a surge of viewership as Americans, caught at dwelling and with no dwell sports activities to look at, binge-watched collection together with “Tiger King,” “Love is Blind” and “Ozark.”
Apple (AAPL) has been dinged by the pandemic, which scrambled its provide chains in Asia and is sapping demand for dear iPhones and different devices. But Apple’s income nonetheless inched up 1% throughout the first quarter.
Alphabet and Facebook are hurting from a pointy drop in promoting, although maybe not by as a lot as some had feared. Alphabet’s advert gross sales nonetheless grew throughout the first quarter, simply not by as a lot as in the previous.

No money crunch right here

Yet these stocks have all bounced again as a result of, particularly throughout these unsure instances, buyers are craving development and sturdy observe data.

“There is much more confidence and visibility in the tech sector. Investors are willing to pay a premium for that,” mentioned Keith Lerner, chief market strategist at Truist/SunTrust Advisory.

Earnings estimates for the tech sector have dipped solely 3% over the previous month, in response to Lerner. The communication companies sector, dwelling to Facebook and Alphabet, is down 14%. Both are a lot better than the 21% drop in earnings estimates for the S&P 500 total.

Moreover, Big Tech has the monetary flexibility to get by the disaster. Not solely have many of those corporations constructed up mountains of money, but they’ll simply faucet the capital markets to get loads extra, if wanted.

Contrast that with the latest bankruptcies of Hertz (HTZ), J.Crew, Neiman Marcus and projections for dozens of oil corporations to go below.

The huge 5 make up 21% of the S&P 500

The fast resurgence of Big Tech has performed an outsized function in the restoration of the general inventory market due to the dominant function these corporations have in the S&P 500.

The 5 greatest stocks — Apple, Amazon, Microsoft, Alphabet and Facebook — make up 21% of all the S&P 500’s market worth, in response to Goldman Sachs, which mentioned this is the best market focus in latest reminiscence.

That means these 5 corporations’ sector weighting is roughly equal to the mixture of three of the inventory market’s weakest sectors: financials (10%), industrials (8%) and power (3%).

“When you look under the surface, the market is not as strong as the headlines suggest. That’s because of the strength of tech,” mentioned Principal’s Shah. “The truth is, there are major economic risks underlying this.”

This phenomenon is working in Wall Street’s favor by serving to to hold the broad market indexes sharply larger, even when a few of the underlying items stay weak.

And the rising inventory market may even assist the actual economy if it interprets to stronger client and enterprise confidence that results in a rebound in spending.

But there are limits to how lengthy Big Tech can carry the remainder of the market on its shoulders.

“The divergence between winners and losers is extreme. At some point, that rubber band will stretch too much,” mentioned SunTrust’s Lerner.

Wall Street’s reliance on Big Tech may backfire if the business all of the sudden falls out of favor in the occasion of poor earnings or an antitrust crackdown by Washington, for instance.

“We almost need every single large tech company to continue to do well,” mentioned Shah. “That is a huge vulnerability for the market.”

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