Believe it or not the so-called FAANG stocks (Facebook, Amazon, Apple, Netflix and Google) plus Microsoft have accounted for 41% of this year's 8.7% rise in the S&P 500.
If you're perplexed by this move know that there's solid fundamental reasons behind it. But before we get to that here's the year-to-date performance in FAANG + Microsoft stocks versus the S&P 500:
- Facebook (FB): +34.5%
- Amazon (AMZN): +34.7%
- Apple (AAPL): +33.8%
- Netflix (NFLX): +33.9%
- Google (GOOGL): +26.7%
- Microsoft (MSFT): +15.8%
- versus S&P 500: +8.7%
The FAANG stocks are up because the U.S. economy is accelerating. More specifically, American growth is picking up and inflation is slowing down. In our proprietary four quadrant Growth, Inflation, Policy model that's called Quad 1. (Here's the breakdown of the other quadrants... Quad 2: Growth Accelerating, Inflation Accelerating; Quad 3: Growth Slowing, Inflation Accelerating; Quad 4: Growth Slowing, Inflation Slowing.)
We've back-tested how asset classes perform over the trailing 20 years in each of these four quadrants using quarterly returns. In Quad 1, Technology (XLK) and Consumer Discretionary stocks (XLY) are the best performing sectors in the S&P 500 rising on average +4.4% and 4% respectively. You can see this in the Chart of the Day below.
In today's Early Look titled "Time to Sell FAANG?," Hedgeye Senior Macro analyst Darius Dale adds additional color:
"Fundamentally speaking, this in the PERFECT market environment for the components of FAANG to outperform in that Tech and Consumer Discretionary are the two best-performing U.S. equity sectors in the current and prospective growth and inflation regime as identified by our proprietary, four-quadrant GIP Model process (i.e. #Quad1). Specifically with respect to the trailing 20 years of quarterly observations, Consumer Discretionary and Tech have positive expected values of +4.4% and +4.0%, respectively, in #Quad1 (i.e. GROWTH ↑; INFLATION ↓), which are the first and second best return profiles across the ten GICS Level 1 sectors."
