Believe it or not the FAANG index, you know the one with most of our favourite super-sized technology stocks, is up 50% year to date. The last time we saw such a huge surge was when we were all stuck at home and the internet was pretty much all we had going on. So, what’s driving this performance and more importantly, can it last?
The first thing to note is the huge divergence in performance of the index members. Whereas Netflix and Meta, whilst up big on the year, are still down about a third from recent highs, it has been Nvidia that has gone on an absolute tear. A lot of that has to do with the market’s latest infatuation with anything AI-related and few would bet against the prospects of artificial intelligence solving all our problems.
Then there is the safe haven argument. With the world economy on the ropes, a potential banking crisis in the making, and commodities pricing in a recession, why not just put your money into Apple? The balance sheet looks a lot better than most banks and the cash flows seem to only ever keep growing. There really is not much you cannot do with the ease of the iPhone, which has already taken over the world.
So called “mega-caps” also feature prominently in the universe of ETFs that track any number of indices. The bigger the stock, the bigger the percentage of allocation from the billions that flow into the markets every year. On that note, if you excluded the performance of the five biggest constituents of the S&P500, the index would not be up more than 8% this year, but down about 6%. That’s incredible.