Although the stock market in the US had rebounded impulsively from the March lows, the apparent strength actually relies on the “usual suspects”, the FAANG stocks. Facebook, Apple, Amazon, Netflix, and Google are trading near or at record highs, following an accumulation of investments. Strong names before the COVID-19 pandemic are outperforming, as expected, but not that these 5 stocks hold a fifth of the S&P500, some analysts are starting to get worried.
An analogy with the dot.com bubble
In the late 1990s, a tech bubble occurred, as the mania around the internet spurred investments without any care for fundamentals. The “Nifty 50” were a group of stocks that surged to unimaginable levels, holding a significant share of the Nasdaq, all while producing little or no profits. Same as it happens today, the market is ignoring fundamentals and keeps pouring money into a few important names.
Following last week’s quadruple witching, stocks had performed relatively-poor, as it was expected, pressured by rising COVID-19 cases in the US. Even though they’ve retraced little from the highs, FAANG stocks hold a whopping 20% of the S&P500. The market could continue to rely on these names, but if they’ll start to lose ground, the impact on the overall market will have the same magnitude as on the way up.
When will valuations start to count?
With central banks printing money, price discovery is delayed and markets run higher on steroids. However, this isn’t the first time stock prices rise impulsively only to drop at the same pace later on. The past few days had shown us that stock markets can drop when COVID-19 cases are rising, which means as long as the health crisis won’t improve, an upside cap will be in play.
CFD traders must be aware that starting from July, US companies will start to publish earnings reports for the second quarter. As economic activity had been dampened by the lockdown, analysts expect to record negative numbers. That’s not a good sign for stocks, which had been disconnecting from the underlying fundamentals during the past two months.
Worse-than-expected earnings could put downward pressure even on the FAANG stocks as the market need to reverse to the mean. Right now, P/E ratios are around 22 for the S&P500, but the Q2 earnings are not yet factored in. Investors are expected to be selective since some sectors will outperform others. What do you think about the stock market in the month ahead? Share your thoughts in the comments section below.