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By Keith Creveling, CFA - September 26, 2017
The current equity bull market in the U.S. has been running, almost unchecked, since the end of the financial crisis in early 2009. While many U.S. companies rebounded as the Federal Reserve initiated its accommodative monetary policy and the economy recovered, that run has been dominated by information technology (IT) stocks in general, and by a small group of companies in particular. The FANG stocks—Facebook, Amazon, Netflix and Google (now Alphabet)—has been responsible for the lion’s share of U.S. market gains over the last several years.
Buoyed by solid sales growth, the FANG names have enjoyed significant price appreciation compared with the overall market. While the S&P 500® Index gained approximately 9.5 percent year-to-date through August 31, an equally weighted portfolio of the FANGs would have returned more than 35 percent. This appreciation has led investors to question if valuations have gotten too high and if current growth levels are sustainable. Some have even wondered if we have another “tech bubble” on our hands, as we did in 2000, when the tech-heavy NASDAQ collapsed.
It is worth noting that the S&P technology sector represented around one quarter of the market weight of the S&P 500 at the end of July. This is significant, but still a considerable distance from the one-third weighting reached in March 2000, just before the tech bubble burst. The FANGs alone represent about 10 percent of the market weight of the S&P 500.
Yes, that is a lot of market weight (and market performance) attributable to a small number of companies. Top-line sales growth has continued to be strong for this group, justifying to many their lofty valuations. But, the outsized effect of FANG performance is increasing investors’ concerns about a market correction should any of the FANGs experience even a minor reversal.
First, there are companies who are employing similar business models in other parts of the world, where penetration levels remain lower and growth trajectories may have more upside. Alibaba, Rakuten and Zalando are e-commerce success stories in China, Japan and Germany, respectively. In China, Tencent dominates social media much the way Facebook does in the U.S. And China’s Baidu and Russia’s Yandex operate similarly to U.S.-based search engine Google.
Next, we see opportunities among technology companies beyond the FANG names. Companies positioned to benefit from increasing adoption of cloud computing, such as Adobe and Autodesk, and those benefiting from expanded use of electronic payment systems, including Visa, Mastercard, and Paypal, are examples.
There are also attractive companies to be found entirely outside technology. Increased consumer activity and a weaker U.S. dollar are helping U.S.-based companies with overseas exposure. At the same time, economic improvement and stronger domestic demand are driving earnings growth in well-positioned consumer companies in Europe, Japan, and the emerging markets.
Consumer trends globally are being disrupted by e-commerce, but some companies are successfully navigating those challenges, such as Home Depot. Companies such as Jeronimo Martins, which operates retail stores in markets such as Poland, continue to benefit from a cyclical recovery and increasing consumer purchasing power in core markets. Other opportunities include Kering, which is benefiting from a recovery in luxury goods spending.
As always, we will continue to employ our disciplined, bottom-up investment process to help identify those specific stocks we believe have the potential for sustainable earnings acceleration, regardless of their region, sector, or industry.
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Facebook, Amazon, Netflix, and Google (FANG) have been responsible for the lion’s share of U.S. market gains over the last several years.
September 26, 2017
References to specific securities are for illustrative purposes only, and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.
International investing involves special risks, such as political instability and currency fluctuations.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.