A big tech trade is losing its lustre

The NYSE FANG+ Index, which tracks popular stocks like Meta Platforms, Apple, Amazon and Netflix, has tumbled 10% this year.

One of the biggest ruptures in the FAANG stocks came after Meta’s disappointing earnings report. Picture: Getty Images

The stockmarket’s popular FAANG trade is starting to show cracks.

Investors say they are reconsidering their approach to trading big technology stocks after a week marked by giant swings in share prices. They are more closely sifting through the winners and losers to try to identify those that might thrive over the next year.

Gone, several investors say, are the days in which the stocks logged a simultaneous ascent and attracted crowds of fans. Some have become victims of rising interest rates, changing consumer tastes and stretched valuations. Those that have fallen short of high investor expectations have paid dearly in the market.

For the past three years, Facebook parent Meta Platforms, Apple, Amazon, Netflix and Google-parent Alphabet recorded big, simultaneous gains. So far this year, all five have fallen.

The NYSE FANG+ Index, which tracks those popular stocks alongside a handful of others, has tumbled 10 per cent this year, underperforming the broader market. Some stocks in the group, such as Netflix and Meta, are off at least 38 per cent from their highs. The S&P 500, in contrast, is down 6.2 per cent from its record.

“As a group, it was very strong over the past 10 years,” said Amy Kong, chief investment officer of Barrett Asset Management. “At this juncture, you are starting to see some cracks.”

One of the biggest ruptures came after Meta’s disappointing earnings report when investors shaved more than $US230bn off the social media giant’s market value, the biggest-ever loss for a US company in a single session.

Ms Kong said she held shares of Meta and other tech giants but had looked for opportunities to unload shares of the Facebook parent. She has remained optimistic on other tech heavyweights and encouraged by some earnings reports.

Instead of the blockbuster growth recorded in previous years, some tech executives are warning of a slowdown. Meta cautioned that people were spending less time on its more lucrative services, and it expected revenue growth to slow. Netflix executives said the streaming-video company would add fewer subscribers this quarter than many had expected.

Netflix shares dropped 22 per cent in the following session, their biggest one-day fall since 2012. The recent declines are a sharp shift from their big gains during the first year of the Covid-19 pandemic when, like Facebook, the shares soared as a beneficiary of the stay-at-home trade.

Earnings season isn’t the only factor spurring turbulence in tech stocks. The sector has been roiled since the beginning of the year, as many investors have prepared for the Federal Reserve to raise interest rates and positioned for other corners of the market to flourish.

That has pushed bond yields to the highest level since 2019 and led investors to flee the tech sector in particular. Higher yields can make these stocks less attractive because they reduce the value that investors place on their future earnings.

In coming days, investors will be parsing quarterly reports from tech companies such as Twitter and Uber for any signs of slowing growth. “You are starting to see that, as a group, maybe that momentum is subsiding to a degree,” Ms Kong said. But, she added, “this group is ever-evolving”.

In recent years, other acronyms have emerged to capture the hottest stocks of the moment, like Nvidia and Microsoft. Those shares helped propel the S&P 500 last year, contributing to more of its roughly 29 per cent return than Amazon and Netflix, according to S&P Dow Jones Indices. Some investors even dispute Netflix’s place among the heavyweights.

This year, Netflix and Facebook have lost about 30 per cent each. Amazon shares remain down 5.4 per cent even after Friday’s large gains. Apple and Alphabet have lost 2.9 per cent and 1.1 per cent, respectively, outperforming the broader market.

There are signs individual investors are pivoting to other trades and buying the dips in some of the tech stocks.

Over the past week, several of the tech heavyweights have rebounded. The NYSE FANG+ index added 3.1 per cent, and the tech-heavy Nasdaq outperformed the S&P 500.

By one measure, Tesla, Advanced Micro Devices and Nvidia recently recorded the biggest net inflows among individual investors than at any point since September 2020.

“You can’t just throw a dart at the wall at a tech name and it’s going to do really, really well,” said Daniel Morgan, a senior portfolio manager at Synovus Trust, which owns shares of the tech heavyweights. “The mentality has changed significantly.” It used to be, just buy FAANG.

“Well, half the FAANG stocks aren’t doing very well.”

Defenders of a modified FAANG strategy, which includes Microsoft alongside Meta, Amazon, Apple, Netflix and Alphabet, point out that holding all six stocks at market weightings this year would have cushioned some of the blow that tech investors have suffered. The market-weighted portfolio is down 8.1 per cent this year, compared with a roughly 10 per cent decline in the Nasdaq.

The relative strength of the market-weighted portfolio in part reflects the stronger performance this year of some of the largest stocks in the basket, Apple, Alphabet and Amazon. Amazon’s strong results Thursday — when it said its profit nearly doubled in the holiday period — led to a 14 per cent pop in the stock Friday that helped send the broader market higher to end the week. The move added $US191bn in market value, making it almost as dramatic as Facebook’s decline a day prior.

The Wall Street Journal