Are FAANG stocks about to make a comeback? With the US poised to revive its economy this year, cyclical stocks are supposed to carry the load and take the lead. However, tech stocks led by FAANG: Facebook, Amazon, Apple, Netflix, and Google (Alphabet) are still going strong despite their sky-high valuations. It seems that the tech market isn’t ready to head to the bench. At least not this year.
Record Highs Wednesday
On the week of President Joe Biden’s inauguration, all three major indices celebrated by posting record highs. The DJIA, S&P 500, and Nasdaq all closed with all-time higher numbers. Plus, Nasdaq and S&P 500 continued the stellar climb Thursday, buoyed by growth stocks yet again. Communication services, the lead sector, went off, gaining 6%. Tech stocks followed with a 4.5% rise as well. Expectedly, FAANG names lit prominently during the rally and continued to rise this week.
Cresset Wealth Advisors CIO Jack Ablin said retail investors are behind it. They continue to drive the big growth names higher, and it seems there’s more to come. Big Tech and FAANG are releasing their previous quarter’s numbers within the next two weeks. Netflix already reported on their numbers, and their numbers spoke volumes. They captured over 200 million subscribers by December last year, and have so much cash they’re now looking at buybacks.
Microsoft will continue Tuesday, then Apple and Facebook on Wednesday.
“Near-term, investors probably want high-quality companies that are making money. Valuation by itself is not a timing tool and expensive stocks can get more expensive. I think they have risk. We did take some of our growth risks off the table at the beginning of the year,” Ablin noted.
Overdue For A Correction
Given their already high valuations, analysts foresee a slowdown in big cap growth.
However, they may serve as an important source of solace if the market starts a pullback. A market correction is overdue, and selloffs can happen in the next few months.
Lori Calvasia, US equities chief at RBC thinks that growth seems to pull through during earnings season. “They continue to put the numbers out. … Putting the earnings aside, I looked at the performance [Wednesday] and saw the defensive growth trade working,” she observed. She believes that growth stocks will continue to rise. “When we look back at this year as a whole, they’re going to be up but they’re not going to be up as much as the market,” Calvasina said. A pullback will happen but on the shallow side. Worst-case, it could reach mid-double digits.
FAANG Held The Market Up in 2020
FAANG stocks were some of the biggest market gainers last year. After the horrific sell-off during March at the beginning of the pandemic, FAANG stocks were among those who rose and reignited the market into a massive bull run. Calvasina did note that pandemic fears are pushing investors to return money back into growth stocks. Meanwhile, a looming shadow hangs over these stocks. Given their size and influence, a number of regulatory and antitrust issues hover over the firms. In fact, Facebook, Alphabet, Amazon, and Apple face antitrust allegations here in the US and in the European community.
Ablin expects a market pullback, and the loss will depend on what starts it, how much growth names are hurt depends on what triggers the decline. “All things being equal and the market drops, it is going to be the FANG stocks that probably fall more. If the market drops in response to some economic disappointment then it will likely be the cyclical stocks that decline more,” he said.
Shallow Pullback by Q1
For now, the market remains buoyant due to optimism fueled by news from the Biden administration. A generous stimulus package is in the works. Meanwhile, a federal coronavirus vaccine rollout program is underway. The Fed’s low-interest policy is staying put for now.
Fundstrat’s Robert Sluymer expects a sell-off, and it might come soon. “Our outlook remains unchanged, bullish for equities through 2021 while expecting a tactical pause/pullback to develop by mid Q1, potentially as early as month-end,” Sluymer wrote. In addition, he said weekly momentum indicators are pointing to overbought levels by February. “Looking through Q1, we expect the pullback to be relatively shallow (7-10%), short-lived, and dominated by sector and group rotation,” he predicted.
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Will FAANG Stay Sharp?
Do you agree that growth stocks, including FAANG and another tech, will continue to rise despite emerging cyclicals? Also, will the expected stock pullback remain short or will it drag out? Let us know what you think about 2021’s stock outlook. Share your thoughts below.