background image

Why FAANG stocks got chewed up

Picture of Peter Garnry
Peter Garnry

Chief Investment Strategist

Summary:  The stock market is a sea of red right now, particularly the tech behemoths. There are several, mainly technical, reasons for this and panic would be premature.


NASDAQ 100 Index futures are down 1.7% so far today, reminding everyone that equities can indeed fall and especially that gravity also applies to the FAANG stocks.

In my Bloomberg TV interview earlier this session I talked about the valuation premium between the NASDAQ 100 and the S&P 500 is shrinking fast, in line with previous experience whenever growth expectations have come down. The obvious periods are 2015-2016, 2010-2013, 2008, 2004/05. The next destination for the NASDAQ 100 Index is likely around the 6,250 area or around 2.9% lower from here. I said on Bloomberg TV that the likely drawdown extension was somewhere around 5% from current levels.

I believe three forces are playing technology stocks down: 1) momentum funds shifting out of previous winners, 2) retail investors getting nervous about their FAANG stocks with large gains from previous years, 3) large asset managers are in general changing positions to account for a weaker entry to 2019. The last potential driver is that hedge fund concentration has been massive in technology stocks and remember these funds live to see another high watermark to get their 20% cut of profits.

Do I think this is the one in the sense that we will plunge into a dramatic bear market? No, I don’t think so. At one point value investors will come into the game in technology because of valuation. To give some perspective, Facebook is now valued at a 6% discount to the S&P 500! And Apple is valued at a 26% discount to the S&P 500 on EV/EBITDA. Facebook’s free cash flow yield is 5.1% – typically something we see at utilities or consumer staples companies. Remember many of these technology companies are quasi monopolies and regulation will not change that in the short term so there is a mean-reversion case in US technology stocks at one point.

In my Bloomberg interview I sketched out a potential path from current wobbling markets: No major breakthrough on Sino-US trade at the G20 meeting, together with another Fed rate hike in December, leads equities lower thereby weakening Trump’s manoeuverability. The Fed changes course in Q1 halting rate hikes and late Q1 investors will realise that China’s stimulus is indeed working and equities stage another leg up, led by China – European equities will be helped too by China due to deep trade connections. 

What would it take to scream SELL EVERYTHING? It would require leading indicators in negative territory, credit markets collapsing, China unable to engineer a rebound, US-China conflict worsens dramatically. And none of these scenarios are anywhere near reality at this  juncture.
Nasdaq

Quarterly Outlook

01 /

  • Upending the global order at blinding speed

    Quarterly Outlook

    Upending the global order at blinding speed

    John J. Hardy

    Global Head of Macro Strategy

    We are witnessing a once-in-a-lifetime shredding of the global order. As the new order takes shape, ...
  • Equity outlook: The high cost of global fragmentation for US portfolios

    Quarterly Outlook

    Equity outlook: The high cost of global fragmentation for US portfolios

    Charu Chanana

    Chief Investment Strategist

  • Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Quarterly Outlook

    Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Jacob Falkencrone

    Global Head of Investment Strategy

  • Commodity Outlook: Commodities rally despite global uncertainty

    Quarterly Outlook

    Commodity Outlook: Commodities rally despite global uncertainty

    Ole Hansen

    Head of Commodity Strategy

  • Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    Quarterly Outlook

    Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    John J. Hardy

    Global Head of Macro Strategy

  • Equity Outlook: The ride just got rougher

    Quarterly Outlook

    Equity Outlook: The ride just got rougher

    Charu Chanana

    Chief Investment Strategist

  • China Outlook: The choice between retaliation or de-escalation

    Quarterly Outlook

    China Outlook: The choice between retaliation or de-escalation

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: A bumpy road ahead calls for diversification

    Quarterly Outlook

    Commodity Outlook: A bumpy road ahead calls for diversification

    Ole Hansen

    Head of Commodity Strategy

  • FX outlook: Tariffs drive USD strength, until...?

    Quarterly Outlook

    FX outlook: Tariffs drive USD strength, until...?

    John J. Hardy

    Global Head of Macro Strategy

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

Content disclaimer

None of the information provided on this website constitutes an offer, solicitation, or endorsement to buy or sell any financial instrument, nor is it financial, investment, or trading advice. Saxo Bank A/S and its entities within the Saxo Bank Group provide execution-only services, with all trades and investments based on self-directed decisions. Analysis, research, and educational content is for informational purposes only and should not be considered advice nor a recommendation.

Saxo’s content may reflect the personal views of the author, which are subject to change without notice. Mentions of specific financial products are for illustrative purposes only and may serve to clarify financial literacy topics. Content classified as investment research is marketing material and does not meet legal requirements for independent research.

Before making any investment decisions, you should assess your own financial situation, needs, and objectives, and consider seeking independent professional advice. Saxo does not guarantee the accuracy or completeness of any information provided and assumes no liability for any errors, omissions, losses, or damages resulting from the use of this information.

Please refer to our full disclaimer and notification on non-independent investment research for more details.

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15
2900 Hellerup
Denmark

Contact Saxo

Select region

International
International

All trading and investing comes with risk, including but not limited to the potential to lose your entire invested amount.

Information on our international website (as selected from the globe drop-down) can be accessed worldwide and relates to Saxo Bank A/S as the parent company of the Saxo Bank Group. Any mention of the Saxo Bank Group refers to the overall organisation, including subsidiaries and branches under Saxo Bank A/S. Client agreements are made with the relevant Saxo entity based on your country of residence and are governed by the applicable laws of that entity's jurisdiction.

Apple and the Apple logo are trademarks of Apple Inc., registered in the US and other countries. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.