For some investors, this year’s rout in high-flying technology stocks is more than a bear market: It’s the end of an era for a handful of giant companies such as Facebook parent Meta Platforms Inc. and Amazon.com Inc.
Those companies — known along with Apple Inc., Netflix Inc. and Google parent Alphabet Inc. as the FAANGs — led the move to a digital world and helped power a 13-year bull run.
But history shows that market leaders of one era almost never dominate the next one. There are early signs that a shift is already under way: Growth has slowed or evaporated for Netflix and Meta, while the sheer size of Amazon, Apple and Alphabet means they’re unlikely to provide the huge returns in the future that they did in the past.
“We think it is unlikely the FAANG will lead the next tech bull cycle,” Richard Clode, a portfolio manager at Janus Henderson Investors, said by phone, adding that he has reduced his holdings of those stocks “very materially.” “We are at our lowest exposure to FAANG that we’ve been since the acronym was created.”
If it is indeed the end of the cycle for these companies, what an ending it’s been.
The outbreak of the coronavirus pandemic in early 2020 rocked the whole stock market, but after a blink-and-you-missed-it plunge, indexes came roaring back. Large-capitalization technology stocks including the FAANGs led the way as locked-down consumers ordered goods from Amazon, subscribed to Netflix to watch “Tiger King,” and spent hours scrolling through Facebook and searching on Google using iPhones.
But investors are reassessing their longer-term potential now that societies have reopened and higher interest rates around the world have damped risk appetites.
One of the biggest draws for investors has been the super-charged growth rates that technology companies offered. Now the growth looks more pedestrian.
“Superior” sales growth, the characteristic most associated with large-cap tech stocks, has vanished, at least for this year, Goldman Sachs strategists wrote in November. The bank’s strategists predict sales growth of 8% for megacap tech stocks in 2022, below the 13% growth expected for the broader S&P 500 Index.
While Goldman does expect tech companies to deliver faster sales growth than the benchmark next year and in 2024, the gap is much smaller than the average of the past decade, the firm said.
“It’s very hard to grow those mega-revenues at very, very high growth rates the way that they did historically,”said Michael Nell, senior investment analyst and portfolio manager at UBS Asset Management. “While the megacap stocks have held up well, going forward it’s hard to see that they are necessarily going to drive performance from here.”